The company’s share price slipped as low as 61 cents a share on Tuesday.
Avaya executives have “significant doubts” that it can continue as a viable business. At least one analyst thinks bankruptcy could be on the table for the second time in five years.
Avaya Holdings’ revenue fell 20% year over year to $577 million in the third quarter, according to its earnings report. The company’s shares opened today at just 87 cents a share. As of 2:05 p.m. ET, it was down another 38% to just 69 cents. That number was $10 in May.
The falling revenue is compounded by the fact that Avaya borrowed $600 million in June. The company has a “large chunk of convertible debentures that mature in less than a year,” reports Bloomberg.
Adjusted EBITDA was $54 million, 9% of revenue, up from 24% a year ago. That’s just enough to cover the quarterly interest expense that Avaya disclosed.
The third quarter also showed losses of 1.3 to 1.4 billion US dollars.
Try to clear concerns
To address these various concerns, Avaya announced $225 million to $250 million in cost-cutting measures last month. The company expects to save more than $200 million as a result. Avaya has already begun implementing these changes and expects them to translate into savings beginning in the first quarter of fiscal 2023, beginning in October.
Although Avaya officials have not officially announced any layoffs, the company is providing $11 million to cover such expenses if necessary.
Avaya has also retained legal counsel from the law firm of Kirkland & Ellis to advise the company on its options following the earnings results.
In addition, the Audit Committee of the Company’s Board of Directors has launched an internal investigation. It will review circumstances surrounding the Company’s third quarter financial results. The Committee has notified the SEC and Avaya’s external auditor, PricewaterhouseCoopers, of its investigation.
Separately, the Audit Committee has also opened an internal investigation to review matters related to a whistleblower letter. They did not reveal any further details.
Alan Masarek is President and CEO of Avaya. Masarek took over the role in July.
“Our preliminary financial results for the quarter reflect operating and execution weaknesses compounded by a volatile economic environment,” he said. “We are taking aggressive actions to properly size and align Avaya’s cost structure with our contractual recurring revenue business model… We have a lot of work to do, [as] We have a tremendous foundation to build on as we become a stronger, leaner, more agile and more innovative organization.”
However, Avaya faces significant debt.
This spring, Avaya’s cash reserves shrank to $325 million — $600 million down from a year earlier. The company tried to raise a new burden. It wanted to refinance a $350 million convertible bond due 2023. Goldman “originally proposed a $500 million loan at a 12.6% yield,” but buyers were few, the Wall Street Journal reported. The bank eventually placed a “$350 million secured loan with investors at a 15.5% yield.” Avaya later approached JPMorgan, and the bank placed a $250 million secured convertible bond.
During the marketing process, the Journal reported that Avaya executives told lenders that “the company is on track to meet its earnings guidance.”
The path to bankruptcy that Avaya has taken before is not without possibility, writes analyst Dave Michels. It has been less than five years since Avaya emerged from Chapter 11.
“The company has not clearly communicated a detailed vision or technical roadmap for some time,” Michels said. “The few significant updates that have occurred have been poorly communicated. Avaya may have rebranded all of its products as OneCloud to disguise the direction and state of individual product lines within its portfolio.”
But Masarek is bullish, as revealed in Avaya’s conference call on Tuesday, which lasted about 10 minutes. Masarek said he fundamentally believes that Avaya can improve performance in the future.
“I understand very clearly that there are concerns, frustrations and concerns out there with virtually every Avaya stakeholder,” he said. “I came here with my eyes wide open. Give us some time to demonstrate a better future.”