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The Problem with Having Too Much Debt

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It seems like every day, a new headline appears talking about the Eurozone financial crisis. Governments across Europe have borrowed to the hilt and spent the proceeds on government programs or to bailout financial institutions. A common metric for gauging the financial health of a country is the debt to gross domestic product (GDP) ratio. Debt is how much the country owes government bondholders and GDP is a measure of the market value for all goods and services produced in a country in a year.

According to the International Monetary Fund (IMF), Greece’s debt to GDP is 143% and Italy’s is 119%. This compares to the U.S., which has a debt to GDP of 94% and Russia which has a debt to GDP of 12%. As Italy recently found out, the problem with having a high debt to GDP ratio is that lenders demand higher interest rates on any additional bonds the government issues. This leads to a spiral of higher interest payments and additional debt. In order to regain the confidence of the market, governments across the Eurozone have adopted austerity measures by cutting spending and laying off government workers.

So how does this relate to the Unified Communications/IP Telephony industry? Vendors who have a large amount of debt may have to adopt austerity measures of their own which can lead to restructuring, less innovation and less support.

According to public filings with the SEC, Avaya had long-term debt of $6.13 billion as of June 30, 2011. However, during the previous four quarters, Avaya took in revenue of only $5.48 billion. Using revenue as a proxy for GDP gives Avaya a debt to GDP ratio of 112%. No wonder Avaya is constantly restructuring. In fact, according to their SEC filings, Avaya has had restructuring programs in 2008, 2009, and 2010 and states, “Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry…”

On the other hand, ShoreTel has zero debt. ShoreTel consistently reinvests over 20 percent of its revenue into research and development and is constantly hiring additional resources. In fact, ShoreTel has grown its salesforce by over 40 percent during the past year.

No austerity measures needed here. If you’re looking for a UC vendor with solid financial footing, I highly recommend that you look at ShoreTel with its innovative distributed architecture and growing support team.