2010: Consolidation and integration

Friday, January 14, 2011

The declared bankruptcy and subsequent breaking up and selling off of Canadian telecoms equipment maker Nortel in early 2009 received a lot of press at the time, but not much has surfaced about what has happened since then.

US enterprise communications, software and services provider Avaya is working to turn this around. In December 2009 it shelled out US$900mn to purchase Nortel's Enterprise Solutions division, and has since strived to make the transition for Nortel clients as seamless as possible.

BNamericas caught up with John DiLullo, Avaya's president of Americas International, to see how the firm has fared in the CALA region, one year on from having purchased the Nortel assets.

BNamericas: How did your fiscal year, closed September 30, go? What drove business for CALA in 2010 and what are expectations for 2011?

DiLullo: My territory also includes Canada, which is a dynamic space for us right now because of the amount of Nortel business that was included in the acquisition that we did in December. I'll try to keep the thoughts on CALA but as you can imagine, there's a huge amount of interest in the Canadian business.

Generally speaking, we had a solid year. Overall the company grew revenues 22%. We also maintained a healthy gross margin and solid pro-forma results. There were a collection of one-time charges, predominantly associated with the acquisition. As can be expected, it was a mess when we acquired the company [Nortel]. It had been bankrupt for nearly a year, and we went through a stalking horse bid - that whole process. There was a lot of cleanup. I was involved in the company's due diligence efforts and the acquisition, as I was running the Asia theater at the time. With the close of the acquisition, they asked me to come back and take over the Canadian operation and CALA.

We've done a lot of work in a couple of areas that I think have helped sales and helped to retain customers. We built a strategy which we colloquially referred to as "wrap and embrace." And with our Avaya Aura architecture, we tried to build, in the first several releases of the Nortel product and the Avaya ownership, a collection of architectural elements that allow us to make the Nortel and Avaya products operate seamlessly together.

We also made huge investments to allow the Nortel legacy telephone devices to work on the Avaya products, and similarly to have the Nortel voicemail systems work on Avaya products, and the Nortel messaging systems - just generally trying to drive interoperability. The reason behind that is we have a number of enterprise customers that may have 100 sites, and 30 of them may be Nortel and 70 Avaya. This was one of the biggest fears that our installed base had because so many people had both products - there was a big fear that we were going to aggressively end of life on one of the products, or not support them. But our strategy has been the opposite, and it seems to be working.

BNamericas: According to Avaya's filing with the SEC, the CALA region in 2010 posted revenues of US$254mn, versus US$243mn in 2009, which is a 5% increase. But when considering foreign currency exchange rates, it was basically flat. How do you explain the flat growth?

DiLullo: It's a complicated rationalization. My overall theater saw very high growth rates between those two years because of large acquisitions of Nortel business in Canada. In Latin America in particular, there was not a very well established Nortel presence, and in the final days of the acquisition, we did not close on all of the entities in several countries, including Colombia, Brazil and Argentina. And so we had a bit more work to do in going out and finding the customers, finding the resources, finding the support and making them part of the family.

I think we also had some challenges in certain elements of the region in integrating the acquisition plan. Some of the cutbacks at Nortel prior to the closing in Latin America had been pretty severe, and we made a lot of dramatic investments in head count, support, sales and engineering in the months following the closing. I think that helped us to have a pretty decent result in the end.

BNamericas: Would you say then that 2010 was more about consolidation and setting the basis for future growth?

DiLullo: I'd say consolidation and integration. This year we're expecting strong growth for the region.

BNamericas: Any percentage predictions there?

DiLullo: I expect to grow two-three times faster than the US domestic market. We've got a great economy, we have strong emerging countries like Peru, Chile and Brazil, and those economies seem to have hit a trampoline.

Mexico was probably hit the hardest from the US recession, and I even expect strong growth out of there in the coming year.

BNamericas: How did the purchase of Nortel assets change business in Latin America for Avaya?

DiLullo: I'd say it gave us a challenge and an opportunity. We didn't acquire the asset in some of the most prominent countries in Latin America because of some transactional issues. The challenge was to go out and treat these customers like new customers.

We didn't wake up on a Monday morning and have a service responsibility to these customers; rather, we had to go out and earn their business from day one. I think that's a healthy way to interface with a customer, and I think they were excited to see us and know that we were interested in them, even though they had been through what they had been through in the prior 12 months. So I feel that we built a lot of muscle in increasing capabilities to support customers, to keep the systems in high availability and to make it so they could prepare for the future and get the most out of their investments as possible.

BNamericas: In the SEC filings regarding the fiscal year, Avaya made specific mention of one competitor in the region, Intelbras. Are there any M&A plans to expand the Avaya footprint in Latin America?

DiLullo: I don't comment on M&A activity. I'd say in general the company is looking to aggressively develop new products when the market calls for those, to partner with companies to help provide those in OEM or joint development opportunities. In the future, as acquisitions become available, those could be considered.

BNamericas: What's the breakdown of direct sales versus through the partner network?

DiLullo: I don't break out the actual percentages, but the majority of sales in Latin America is through channels. It's a growing business, and I believe that the profitability of the channels grew.

We do surveys with our partners and try to determine whether they're having success with our product, and our feedback indicates that 2010 was a good year for Avaya and for our channels.

BNamericas: Are there any programs planned to further the channel in Latin America?

DiLullo: Probably about a dozen. We're actively trying to recruit partners to make investments in building their capabilities to support the Nortel installed base. We have a collection of new products; in July and September, we introduced a whole suite of video products, workforce optimization products, contact center products, data products.

In 2010, we probably introduced more products than we had in the previous several years as a company, and we're looking for partners with which we can go after these markets. I'd say particularly in video, which is a new entry for us. We were smaller in this in the past, but the new products that we've come out with really give us a leading position in desktop video conferencing, as well as room-based video conferencing. We're currently seeking out and building a partner community to help us accelerate that.

BNamericas: Would this be one of Avaya's main trends going into 2011? Desktop video solutions?

DiLullo: It's a fast growing market, and I expect us to aggressively seize it. And I think it will drive a lot of excitement and growth for the business in the region.

BNamericas: What are some of the similarities and differences you've seen in CALA, compared with your experience in the Asia Pacific theater?

DiLullo: From a business perspective, you have the same energy and the same optimism in Brazil now as in China and India. It's palpable.

There's a lot more similarities between Asia and Latin America in the overall momentum, excitement and optimism of the business leaders. They're willing to experiment with technology, where as in other regions they try to "sweat the assets" - wring every last dollar out of the asset.

Another one is that where there is employment, we're generally helping to build out the infrastructure. So like people that sell office furniture, we also see benefits from general employment trends. The trends are notably positive in Latin America and Asia.

Some of the differences would be the western legal and contracting system in Latin America that's a bit easier to interface with when it comes to transacting business, arranging credit, writing contracts. And the time zone benefits are amazing, and the English is pretty good.

About John DiLullo

John DiLullo is president of Avaya Americas International, responsible for leading Avaya’s operations in Canada and CALA, including sales and support of the company's technology, applications and industry-specific businesses. Before the current position, he was president of Avaya Asia Pacific.

Prior to Avaya, DiLullo was VP of worldwide sales, channels and field operations at SonicWall, and VP of worldwide distribution at Cisco Systems. He has a degree in electrical engineering from Villanova University and studied in a related doctoral program at Stanford University. The executive also has two patents filed in the US.

About the company

New Jersey-based Avaya provides unified communications, contact centers, data solutions and related services, both directly and through channel partners.

The company has some 20,000 employees worldwide, including 3,400 research and development professionals, as well as some 5,100 patents or patents pending, and about 10,000 channel partners worldwide.

Business outside of North America (Canada and the US) represented 41% of total fiscal 2010 revenues of US$5.06bn.