The drama continues to unfold, and this is playing out as many in the press predicted. Mitel CEO Rich McBee has reframed the offer Mitel (MITL) made for Shoretel (SHOR), and that Shoretel rejected, as an opening bid. So far, there are no white knights on the horizon coming to save Shoretel, so Mitel begins the bidding war against… itself.
An awkward courtship between two rivals
Taking a look at the recent earnings out for dear Mitel, and you have a lot of bright spots. Mitel’s cloud business is taking off with over 800,000 seats sold. Year over year, recurring cloud revenue is up 50%, to 21.7M a quarter. The quarter’s loss of 5.1M is actually small beans now that the Aastra merger is complete, amounting to 1.9% of over a quarter billion in quarterly revenue. Cash burn was 12M, leaving $120M in the bank. And another $25M of debt was retired in the last quarter, as the company continues to hack away at the debt burden that went up a sixth following the Aastra merger. 50 people were laid off following the merger, so there does not appear to be a wave of cost consolidation. All in all, Mitel’s story of incremental improvement and shift to a cloud-based business continues apace.
Having seen the product roadmap for Mitel following the Aastra merger, we can say conclusively that the Mitel MiVoice Office 250 (the branded Mitel MiVoice Office that was once the Mitel 5000 after it was the Mitel 5000 HX and the Mitel 5000 CP and the Inter-Tel 5200/5400/5600 systems) is here to stay. It will not be virtualized – that is where the Mitel MiVoice Business comes into play – but it is the Mitel system for the small to medium sized business of up to 250 users. There will be a new Mitel system from Aastra – the Mitel MiVoice Enterprise – that will support up to 500,000 users. Give us a call if you know of any Fortune 500 companies and small countries
If we look at Shoretel’s recent financials, we see an interesting moment in time – GAAP profit! Yes, Shoretel has made some money, though a paltry $366,000 on $90M in revenue for the most recent quarter. Top line revenue is up, they are keeping a lid on costs (snarky competitors will note: marketing is just about 1/3 of revenue and costs), all to be commended. Mitel has pissed all over their parade because this was the quarter Shoretel was waiting for, as they finally achieved enough scale to turn a profit. They are still sitting on a nice pile of cash ($57M).
Cloud though is not such a great facet of the business for Shoretel. Since buying M5, we have not seen a really good cloud story from the brand, since the two lines are not really integrated at this stage. Hosted revenue is up from a year ago, up $4M from $20M to $24M. Competitors like RingCentral and 8×8 are showing massive growth every year. Vonage has leveled off – perhaps due to their large residential service component – but has close to $900M in annual sales.
Diving into the revenue numbers, we see flat product sales. The increase in revenue year over year at Shoretel is the $4M in cloud and $2M in support contracts and services. Support contracts are profitable for manufacturers but also limited as to how large they can grow – they are driven by product sales. You can only jack the price up on your support contracts so many times.
As far as the merger is concerned, Shoretel might want a more dynamic partner than Mitel, and definitely wants more money, but Mitel has shown that they have figured out a way to share a single software stream between premise and cloud, something we are still waiting on with Shoretel. I am not in a position to say whether this hurts Shoretel and accounts for their relatively sluggish growth, but the story with brands like Mitel and Zultys is much easier to tell – customers can just pick the way you want to deploy your system and not think about differences in how things work.
I can also report as a Mitel dealer that there is reluctance from the dealer channel to sell cloud, but no matter, as Mitel has a small army of direct sales reps. Shoretel is more reliant on their dealer channel, so if their dealers look at cloud the way our dealers do (they hate it, more or less) then the slow growth makes sense. Just as Mitel benefited from Inter-Tel’s US & UK sales machine when that merger took place, so Shoretel could start to look at their acquisition by Mitel as leveraging a Mitel sales channel that is already pretty familiar with their product, without hurting their loyal base of dealers who are stuck on premise anyway.
Shoretel’s cloud phones use SIP, their premise phones use MGCP, and until they update their core phone business to the SIP standard they will be at a disadvantage as the days of buying a phone to match your phone system fade into history. Mitel’s new SIP phones are out on the market and will probably make it very hard to compete now that Mitel can leverage Aastra’s scale for production and experience with SIP.
The premise system market is far from dead, but no one is dying to break into the industry, either. Shoretel and Mitel are far more nimble than the large companies competing against them in the SMB marketplace, and have better technology than the hosted-only companies in the space. As feisty as both companies are, it might be time to think about the possibilities a combination affords.