Avaya Reports First Fiscal Quarter 2005 Results

Avaya Inc., (NYSE: AV - News) a leading global provider of business communications software, systems and services, reported income from continuing operations of $33 million or seven cents per diluted share in the first fiscal quarter of 2005.
In the same quarter last year the company reported income from continuing operations of $30 million or seven cents per diluted share.

Avaya said first quarter income from continuing operations of $33 million included a loss associated with its senior secured notes tender, as well as integration costs and write-offs of in-process research and development related to the acquisitions of Spectel and Tenovis. These items had a negative impact of 11 cents per diluted share in the first fiscal quarter. In addition, the acquisitions contributed an operational loss in the quarter. The combined impact of all these charges and losses was a reduction in earnings per share of 13 cents.

Avaya's first fiscal quarter 2005 revenues increased 18 percent to $1.148 billion compared to revenue of $971 million in the first fiscal quarter of 2004. The revenue increase largely reflected the impact of recent acquisitions and favorable currency rates. Excluding these two items, revenues grew at double-digit rates in all regions except the United States where sales were essentially unchanged versus the year ago period.

"We continue to improve our profitability with operating income rising 70 percent year-over-year," said Don Peterson, chairman and CEO, Avaya. "We completed the Tenovis acquisition, shipped our five millionth IP telephony line and substantially reduced our debt. Our first quarter results position us to meet our goals for the year."

Avaya said its fiscal 2005 goals are to increase revenues between 25 and 27 percent compared to fiscal 2004 revenues of $4.055 billion, grow operating income by 40 percent compared to $311 million in fiscal 2004 and raise annualized operating margin to between 8.5 and 9 percent compared to 7.7 percent last year*.

As a result of the Tenovis acquisition, which has a significant rental and managed services business, Avaya made changes and enhancements to its financial reporting:

On a consolidated basis, the company now breaks out revenue into three line items -- products, rental and managed services, and services -- and provide costs for each of these three.

On a segment level, the company groups businesses into two reporting units -- Global Communications Solutions and Avaya Global Services -- and provides a breakout of major revenue line items within each.

The company also is providing more information on the geographic breakout of revenue and product revenue by channel.

First Fiscal Quarter Highlights

During the quarter, Avaya was recognized as a market leader by a variety of industry analyst groups for products and solutions across our portfolio. Among the analyst reports:

- In IP Telephony, Synergy Research Group cited Avaya as the worldwide
leader in enterprise IP telephony -- for the fourth straight quarter.
In Asia Pacific, Frost and Sullivan have noted Avaya as the IP
telephony leader.
- In contact centers, was cited by Frost and Sullivan as the "clear
favorite" in a survey of business leaders.
- In Unified Messaging the IDC Leadership Grid places Avaya significantly
ahead of all competitors.


In the quarter, Avaya put new solutions on the market, including The Avaya Video Telephony Solution: Desktop Edition, an IP-based solution that makes desktop videoconferencing as simple as a phone call. The solution lets users initiate videoconferences from an office, home office or remote location via PC or laptop -- through a broadband or Wireless LAN connection.

We delivered Avaya Modular Messaging -- which can support up to 20,000 users in multiple locations using a single, centralized system and IP telephony and networking.

Customers across the globe are moving or migrating to Avaya IP Telephony, including:

The government of Washington, D.C., which is deploying Avaya voice solutions as part of its DCNet initiative to link 30,000 employees in 360 locations;

In Mexico, we were awarded one of the country's largest IP telephony implementations to date -- a new network for Prosa, a Mexican company specializing in processing electronic transactions, that will connect more than 10,000 endpoints;

Honda UK which has selected Avaya IP Office and wireless networking for dealerships; and

Rakuten, a Japanese eCommerce company with one of the country's largest installations of IP Telephony, which is supported by Avaya IP telephony solutions.

Avaya closed on the following acquisitions in the quarter: Tenovis, a major European provider of enterprise communications systems and services; Spectel, a world leader in audio and web conferencing for enterprises and service providers -- whose products are now being marketed under Avaya Meeting Exchange; and RouteScience, a maker of adaptive networking software that helps companies monitor and manage VoIP and other latency-sensitive traffic over wide area networks.

About Avaya

Avaya Inc. designs, builds and manages communications networks for more than one million businesses worldwide, including more than 90 percent of the FORTUNE 500®. Focused on businesses large to small, Avaya is a world leader in secure and reliable Internet Protocol telephony systems and communications software applications and services.

Driving the convergence of voice and data communications with business applications -- and distinguished by comprehensive worldwide services -- Avaya helps customers leverage existing and new networks to achieve superior business results. For more information visit the Avaya website: http://www.avaya.com

This news release contains forward-looking statements regarding the company's outlook for operating results based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include, but are not limited to, general industry market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations and the economic, political, and other risks associated with international sales and operations, U.S. and foreign government regulation, price and product competition, rapid technological development, dependence on new product development, the successful introduction of new products, the mix of our products and services, customer demand for our products and services, the ability to successfully integrate acquired companies, control of costs and expenses, the ability to implement in a timely manner our restructuring plans, and the ability to form and implement alliances.

For a further list and description of such risks and uncertainties, see the reports filed by Avaya with the Securities and Exchange Commission. Avaya disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

:As previously disclosed, Avaya's fiscal 2004 revenues of $4.055 billion exclude $14 million resulting from a reversal of reserves for sales returns and allowances. The company reversed the reserve as a result of operational improvements during fiscal 2004. Fiscal 2004 operating income of $311 million and operating margin of 7.7 percent exclude $12 million as a result of the reversal.
NOTE: Avaya will host a conference call with a listen-only Q&A session to discuss these results at 5:00 p.m. EST on Tuesday, Jan. 25, 2005. To ensure you are on the call from the start, we suggest you access the call 10-15 minutes early by dialing:

Within and outside the United States: 706-634-2454

For those unable to participate, there will be a playback available from 8:00 p.m. EST Jan. 25, through Feb. 1, 2005. For the replay, if you are calling from within the United States, please dial 800-642-1687. If you are calling from outside the United States, please dial 706-645-9291. The passcode for the replay is 3196207.

WEBCAST Information: Avaya will webcast this conference call live, with a listen-only Q&A session. To ensure that you are on the webcast, we suggest that you access our website (http://investors.avaya.com/) 10-15 minutes prior to the start. Slides accompanying the conference call are available at the same location. Following the live webcast, a replay will be available on our archives at the same web address.

Avaya Inc. and Subsidiaries
Statements of Operations
Three Months Ended December 31, 2004 and 2003
(Unaudited; Dollars and Shares in Millions, except per share amounts)

For the three months ended
December 31,
2004 2003
REVENUE
Sales of products $554 $482
Rental and managed services 117 73
Services 477 416
1,148 971
COST
Sales of products 245 222
Rental and managed services 52 35
Services 308 266
605 523

GROSS MARGIN 543 448

OPERATING EXPENSES
Selling, general and administrative 357 313
Research and development 98 83
TOTAL OPERATING EXPENSES 455 396

OPERATING INCOME 88 52
Other income (expense), net (38) 6
Interest expense (10) (21)

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 40 37

Provision for income taxes 7 7
INCOME FROM CONTINUING OPERATIONS 33 30

DISCONTINUED OPERATIONS
Loss from discontinued operations (2) (a) (18)
Provision for income taxes -- 2
LOSS FROM DISCONTINUED OPERATIONS (2) (20)

NET INCOME $ 31 $ 10

EARNINGS (LOSS) PER SHARE - BASIC
Earnings per share from continuing operations $0.07 $0.07
Loss per share from discontinued operations -- (0.05)
EARNINGS PER SHARE $0.07 $0.02


For the three months ended
December 31,
2004 2003

EARNINGS (LOSS) PER SHARE - DILUTED
Earnings per share from continuing operations $0.07 $0.07
Loss per share from discontinued operations -- (0.05)
EARNINGS PER SHARE $0.07 $0.02


BASIC SHARES 460 421
DILUTED SHARES 492 459

(a) The $2 million loss from discontinued operations in the first quarter
of fiscal 2005 was associated with the finalization of the working
capital adjustment related to the sale of Connectivity Solutions.


Avaya Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2004 and September 30, 2004
(Unaudited; Dollars in Millions, except per share amounts)

December 31, September 30,
2004 2004 (a)
ASSETS
Current assets:
Cash and cash equivalents $911 $1,617
Receivables less allowances of $43 and $48
as of December 31, 2004 and September 30, 2004,
respectively 774 696
Inventory 351 239
Deferred income taxes, net 93 27
Other current assets 164 145
TOTAL CURRENT ASSETS 2,293 2,724

Property, plant and equipment, net 916 509
Deferred income taxes, net 338 400
Goodwill (b) 793 257
Other intangible assets (c) 531 75
Other assets 209 194
TOTAL ASSETS $5,080 $4,159

LIABILITIES
Current liabilities:
Accounts payable $437 $345
Debt maturing within one year 117 299
Payroll and benefit obligations 290 328
Deferred revenue 200 178
Other current liabilities 380 273
TOTAL CURRENT LIABILITIES 1,424 1,423

Long-term debt 251 294
Benefit obligations 1,609 1,263
Deferred income taxes, net 168 --
Other liabilities 404 385
TOTAL NON-CURRENT LIABILITIES 2,432 1,942

Commitments and contingencies

December 31, September 30,
2004 2004 (a)
STOCKHOLDERS' EQUITY
Series A junior participating preferred stock,
par value $1.00 per share, 7.5 million shares
authorized; none issued and outstanding -- --
Common stock, par value $0.01 per share,
1.5 billion shares authorized, 479,535,790 and
455,827,524 issued (including 85,731 and 0
treasury shares) as of December 31, 2004 and
September 30, 2004, respectively 5 5
Additional paid-in capital 2,922 2,592
Accumulated deficit (943) (974)
Accumulated other comprehensive loss (759) (829)
Less treasury stock at cost (1) --
TOTAL STOCKHOLDERS' EQUITY 1,224 794
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,080 $4,159


Notes to the Balance Sheets:
(a) Certain prior year amounts have been reclassified to conform to the
current period presentation.

(b) The increase in goodwill at December 31, 2004 is primarily related to
the first quarter fiscal 2005 acquisitions of Tenovis ($469 million)
and Spectel ($59 million).

(c) The increase in other intangible assets at December 31, 2004 is
primarily related to the first quarter fiscal 2005 acquisitions of
Tenovis ($412 million) and Spectel ($46 million).


Avaya Inc. and Subsidiaries
Operating Segments
Revenue and Operating Income (Loss) from Continuing Operations
Quarterly Trend
(Unaudited; Dollars in Millions)

REVENUE
For the Fiscal Year Ended
September 30, 2004

Q1 Q2 Q3 Q4 YTD

Global Communications Solutions $ 480 $ 493 $ 506 $ 565 $ 2,044
Avaya Global Services 489 511 510 511 2,021
Corporate 2 2 -- -- 4
Total Avaya $ 971 $ 1,006 $ 1,016 $ 1,076 $ 4,069


For the Fiscal Year Ended
September 30, 2005

Q1 Q2 Q3 Q4 YTD

Global Communications Solutions $ 592 $ -- $ -- $ -- $ 592
Avaya Global Services 556 -- -- -- 556
Corporate -- -- -- -- --
Total Avaya $ 1,148 $ -- $ -- $ -- $ 1,148


OPERATING INCOME FROM CONTINUING OPERATIONS

For the Fiscal Year Ended
September 30, 2004

Q1 Q2 Q3 Q4 YTD
Global Communications Solutions $ 2 $ (3) $ 17 $ 55 $ 71
Avaya Global Services 53 63 68 65 249
Corporate: (A) (3) -- 7 (1) 3
Total Avaya $ 52 $ 60 $ 92 $ 119 $ 323


For the Fiscal Year Ended
September 30, 2005

Q1 Q2 Q3 Q4 YTD

Global Communications Solutions $ 25 $ -- $ -- $ -- $ 25
Avaya Global Services 56 -- -- -- 56
Corporate: (A) 7 -- -- -- 7
Total Avaya $ 88 $ -- $ -- $ -- $ 88

(A) Costs remaining in the corporate category represent expenses that are
not identified with the operating segments and include the under or
over estimated portions of corporate overhead expenses not charged to
the segments, as these expenses are allocated on a fixed basis.


Avaya Inc. and Subsidiaries
Condensed Statement of Cash Flows
Three Months Ended December 31, 2004 and 2003
(Unaudited; Dollars in Millions)

For the three months ended December 31,
2004 2003

Net cash used in operating activities
of continuing operations $ (36) $ (27)

Net cash used in investing activities
of continuing operations (400) (a) (122) (a)

Net cash (used in) provided by financing
activities of continuing operations (288) (b) 16

Effect of exchange rate changes on cash
and cash equivalents 18 9

Net cash used in continuing operations (706) (124)

Net cash used in discontinued operations -- (24)

Net decrease in cash and cash equivalents (706) (148)

Cash and cash equivalents at beginning of
fiscal year 1,617 1,192

Cash and cash equivalents at end of period $ 911 $ 1,044

(a) Includes capital expenditures of $22 and $20 and capitalized software
development costs of $14 and $8 for the three months ended
December 31, 2004 and 2003, respectively.
Includes $383 and $97 relating to acquisition of businesses, net of
cash acquired for the three months ended December 31, 2004
and 2003, respectively.

(b) Includes $314 related to the repurchase of the senior secured notes
for the three months ended December 31, 2004.


Avaya Inc. and Subsidiaries
Certain Items Included in Reported Results That May Affect Comparability
Three Months Ended December 31, 2004 and 2003
(Unaudited; Dollars in Millions, except per share amounts)

For the three months ended
December 31,
2004 2003

Certain Items Included in Income from
Continuing Operations:
Loss on Senior Secured Notes extinguishment $ (41) $ --
IPR&D write-offs associated with the acquisitions
of Spectel and Tenovis (4) --
Tenovis Integration Costs (6) --
Net Impact of Certain Items Included in Income
from Continuing Operations (51) --
Diluted Shares 492 459
Net Impact of Certain Items on Diluted EPS $ (0.11) $ --
Impact of Results of Operations from Tenovis
and Spectel acquisitions (0.02) --
Impact of Certain Items and Results of Operations
from Tenovis and Spectel on Diluted EPS $ (0.13) $ --

Note: Bracketed amounts represent charges


Avaya Inc. and Subsidiaries
Supplemental Revenue Tables
(Unaudited)

Revenue by Type

First Fiscal Quarter
Fiscal 2004 Mix
Q1 Q2 Q3 Q4 Dollars in 2005 2004 2005 2004 Change
millions
$482 $495 $506 $565 Sales of $554 $482 48% 50% $72 14.9%
products
73 66 64 57 Rental and 117 73 10% 7% 44 60.3%
managed
services
416 445 446 454 Services 477 416 42% 43% 61 14.7%
$971 $1,006 $1,016 $1,076 Total revenue $1,148 $971 100% 100% $177 18.2%


Revenue by Geography
First Fiscal Quarter
Fiscal 2004 Mix
Q1 Q2 Q3 Q4 Dollars in 2005 2004 2005 2004 Change
millions
$738 $760 $769 $822 U.S. $734 $738 64% 76% $(4) -0.5%
International:
128 133 135 142 EMEA - Europe / 278 128 24% 13% 150 117.2%
Middle East /
Africa
50 59 58 59 APAC - 74 50 6% 5% 24 48.0%
Asia Pacific
55 54 54 53 Americas, 62 55 6% 6% 7 12.7%
non-U.S.
233 246 247 254 Total
international 414 233 36% 24% 181 77.7%
$971 $1,006 $1,016 $1,076 Total revenue $1,148 $971 100% 100% $177 18.2%


Sales of Product by Channel
First Fiscal Quarter
Fiscal 2004 Mix
Q1 Q2 Q3 Q4 Dollars in 2005 2004 2005 2004 Change
millions
$213 $211 $219 $280 Direct $250 $213 45% 44% $37 17.4%
269 284 287 285 Indirect 304 269 55% 56% 35 13.0%
$482 $495 $506 $565 Total sales of $554 $482 100% 100% $72 14.9%
products


Avaya Inc. and Subsidiaries
Supplemental Revenue Tables
(Unaudited)

GCS Revenue by Class

Fiscal 2004 First Fiscal Quarter
Mix
Q1 Q2 Q3 Q4 Dollars in 2005 2004 2005 2004 Change
millions
$280 $295 $299 $336 Large $354 $280 60% 58% $74 26.4%
communications
systems
54 58 57 59 Small 69 54 12% 11% 15 27.8%
communications
systems
129 131 133 159 Converged 150 129 25% 27% 21 16.3%
voice
applications
17 9 17 11 Other 19 17 3% 4% 2 11.8%
$480 $493 $506 $565 Total $592 $480 100% 100% $112 23.3%
revenue


AGS Revenue by Class

Fiscal 2004 First Fiscal Quarter
Mix
Q1 Q2 Q3 Q4 Dollars in 2005 2004 2005 2004 Change
millions
$343 $362 $359 $358 Maintenance $371 $343 67% 70% $28 8.2%
73 83 87 95 Implementation 103 73 18% 15% 30 41.1%
and integration
services
73 66 64 57 Rental and 79 73 14% 15% 6 8.2%
managed services
-- -- -- 1 Other 3 -- 1% 0% 3 n/a
$489 $511 $510 $511 Total revenue $556 $489 100% 100% $67 13.7%




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