Wachovia analysts see more pressure on Avaya stock, converts

By Ronda Fears

Nashville, Tenn., July 23 - Avaya Inc. missed expectations for earnings in its fiscal third quarter and guided lower for fiscal fourth quarter. As a result, Wachovia Securities, Inc. analysts Brian Park and Jeanine Oburchay see more pressure for the stock and convertible.

In addition, Avaya management does not expect an upturn in IT spending until 2003.

"We believe the limited guidance given on the call and concern regarding the company's credit facility will put pressure on the equity as well as the converts, despite the converts' current cheapness," according to a report dated Tuesday by Park and Oburchay at Wachovia Securities.

"We believe the company will be able to renegotiate its credit facilities, though."

Revenue was $1.2 billion, down 4.7% sequentially. Despite reducing SG&A expenses 7.4% sequentially, margins were below company expectations, and Avaya missed the consensus EPS by $0.05, reporting an EPS loss of $0.09.

"The company's only guidance was for continued sequential decline in revenue and some improvement in EPS driven by continued cost improvement," the analysts noted.

"The company would not give any guidance as to how much it expected to reduce operating expenses."

Capex guidance for fiscal 2002 was reduced to $125 million from $175 million, resulting in fourth-quarter capex of approximately $30 million.

The company also stated it would take a $150 million to $250 million restructuring charge in the September quarter, 95% of which will be in cash. In addition, the company expects a cash impact of $60 million in the fourth quarter and $40 million in fiscal 2003 related to a restructuring reserve.

Avaya's cash and equivalents balance at the end of the quarter was $406 million, down $153 million sequentially. The company generated $93 million in cash flow from operations. Cash uses during the quarter were $50 million in capex, $55 million in restructuring charges, $126 million to close out its accounts receivable program and $12 million to fully pay down its commercial paper program.

"The company currently has access to a $264 million credit facility maturing in August 2002 and a $561 million facility maturing in September 2005," the analysts said.

"It is currently in discussion with its lenders to adjust covenants, which are at risk of being violated in the next several quarters. We believe the company will likely be able to reach an agreement with its lenders."

The company does not expect to need to tap its credit facility to fund its business through the end of fiscal 2003, ending in September, with improvements expected in accounts receivable and inventory, the analysts noted.

"Working capital had a positive effect on cash over the past two quarters," they added, "and if this trend continues we believe it is possible the company will not need to tap into its credit facility."

The company's next major financial events are the Oct. 31, 2004, puts on its 0% convertible notes. If all the bonds are put back to the company, the analysts said, it would result in a $512 million payment, which can be in cash, stock or a combination.

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