Executive shuffle follows bad Q3 earnings at Avaya

CEO Donald Peterson is out; his replacement is Louis D'Ambrosio

Avaya Inc. CEO Donald Peterson has been replaced by Louis D'Ambrosio, who until yesterday had served as senior vice president and president of global sales and marketing at the company. The move followed the announcement of a drastic drop in third-quarter profits for the communications networking provider.

Peterson, 56, will also step down as chairman on Sept. 30. A company spokeswoman said that decision was made by the board, but declined to comment further.

Basking Ridge, N.J.-based Avaya yesterday reported third-quarter net income of $44 million, or 10 cents per share, compared with $194 million, or 40 cents per share, in the third quarter of 2005. Meanwhile, revenue grew 4.9% for the quarter to $1.297 billion, up from $1.236 billion a year earlier.

Avaya's financial problems came mainly from the continued costs of restructuring following the acquisition of Tenovis GmbH in November 2004, said Allan Sulkin, an analyst at TEQConsult Group in Hackensack, N.J. The company reported a $22 million restructuring charge in the quarter.

In addition, "it seemed like every quarter, things had not been going well for Avaya, with portions of the business not growing," Sulkin said.

Services and applications, while a growing segment of the market generally, had not grown as well as they should have at Avaya, he said. Peterson was Avaya's first CEO following its spinoff from Lucent Technologies Inc. in 2000. D'Ambrosio, 42, joined Avaya in 2002 after serving 16 years at IBM in various posts in software, sales and marketing, and IBM Global Services. He began his career at AT&T, in the same division that later became Avaya. He holds an MBA from Harvard Business School.

In a statement, D'Ambrosio said there are "substantial opportunities for Avaya" as large companies purchase next-generation communications systems.

Peterson could not be reached for comment, although analysts and some customers said they thought he had effectively run the company for six years. "Under Don, Avaya did a great job of creating a strong brand after being spun out of Lucent," said Zeus Kerravala, an analyst at Yankee Group Research Inc. in Boston. "Basically, the leadership change is good as we embark on this new dawn of [voice over IP] as software."

Kathy Brooks, president of the Atlanta Avaya Technology Users Group, said she had not heard of the executive transition and was not concerned about it. "I think Avaya is great and has done a great job for my company, has great service reps, and all my associations have been very positive," Brooks said. Her organization, which has 100 members, meets about six times a year.

Brooks is an IT manager at ACS Government Healthcare Solutions in Atlanta, where about 2,000 users have Avaya IP phones and IP networks from Avaya.

Christine Olsen, president of the Avaya users group in Buffalo, N.Y., said members in her group use Avaya equipment purchased through integrators and resellers, which have limited direct involvement with the company. "Most of us are satisfied with Avaya equipment, but Buffalo is a smaller market, and Avaya has chosen not to service us directly," she said.

Olsen, who is an IT manager at Universa Healthcare in Buffalo, said D'Ambrosio and Avaya face some areas of improvement. "Avaya is good in development and the support of the products they have, but as for the paperwork and billing, they leave a lot to be desired."

"I'm very enthusiastic about Lou D'Ambrosio taking the reins at Avaya," said Bill Moore, communications manager at the Museum of Modern Art in New York. The museum is an Avaya user. "Lou is a dynamic leader and has a reputation for seeing things through the customers' eyes. I believe that Lou has the qualities needed to turn the company around."

Sulkin said Avaya's greatest strength is its product portfolio and its professional services, even though services revenues have not recently grown fast enough. Avaya's biggest weakness, which D'Ambrosio must confront, is that Avaya and other networking equipment makers "have underestimated Cisco, which has hurt everybody."

Sulkin said Avaya has also failed to describe its business in ways that are understood by the investment community and financial analysts. "Avaya is undervalued by the street in that there are very few people ... who have a clue about the business Avaya's in," he said.

While Cisco is a competitor, Cisco handles data networks, whereas Avaya focuses on voice networks. "Avaya has the strongest voice networking products and the best sales channel. They have almost no weaknesses. But Avaya needs to position itself better," Sulkin said.

Copyright © 2006 IDG Communications, Inc.

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