Mitel, Shoretel’s just not that into you

After weeks for not talking to Mitel, it looks like Shoretel’s Board has managed to stay independent, as Mitel announced they are withdrawing their bid to acquire Shoretel. Reaction is pretty muted in the scant press that serves our industry, though some consultants that have historically worked with Shoretel were happy about the outcome.

Shoretel is a cruel mistress

Mitel will be curling up to watch this over the weekend (in German, because they are No.1 in W. Europe, see)

Key takeaways from this episode:

  1. No one is dying to get into enterprise telecom. No one else put a bid out for Shoretel.
  2. Competitors were not interested. As we mentioned in prior posts, competitors were not going to materialize as bidders. Avaya is up to its ears in debt, Cisco walked away from the small-to-medium business market Shoretel and Mitel are fighting over, and the Asian brands (NEC, Toshiba, Samsung) tend to pick “make” over “buy” no matter how bad their product turns out.
  3. Mitel continues to exercise Canadian prudence. Mitel was put in a position of bidding against itself, gamely upped the bid 40c a share, and walked away when Shoretel wouldn’t come to the table. The real risk for Mitel dealers is that Mitel made a bad deal to knock out a competitor and become saddled with debt, which fortunately did not happen.
  4. Wall Street gave a big shrug. Stocks for both companies barely moved, with trading volume for Shoretel off a third from the average.
  5. The hate between the two companies burns bright. Shoretel’s Board choosing to decline the offer is one thing, but refusing to discuss either offer with Mitel leadership is a sign of continued enmity between the two firms.

I am a little disappointed because I would have liked Mitel to capture some of the Shoretel magic when it comes to marketing their products. I am sure Shoretel dealers would have liked the SIP, contact center, security and virtualization capabilities Mitel brings to the table.

The Quietest Industry

It is ironic that an industry built around the human voice has so little said about it. I am thankful for sites like No Jitter, Daily Cloud, and Network World. There are scant resources for even finding comparative tests that are helpful for companies making a big decision. I had never even seen the NY Times cover telephone systems until the phone hacking article saw phone system hacking hit the mainstream media.

Of course, you can turn to the tech community, but you will find that telecom is an IT backwater. Sites like spiceworks and stackoverflow are amazing, fantastic resources that do not quite focus on telecom enough to be useful all the time for help and comparisons, and you never know if the person posting is a shill for a brand or not. Communities like reddit are similarly hit or miss, and written from perspectives that may not be your own. For example, the complaint about the type of RAID a Zultys system runs may be fascinating to sysadmins but perhaps not so important for a small business looking to get some cool new desktop integration features with their phone system.

One concern buyers of telecom equipment should have is in the use of industry consultant reports. Some have noted that some consultants, after receiving funding from an industry group, produce reports that further the interests of said group or are ‘astroturf’ support groups. Some writers describe a web of contributions and partnerships (not just in the USA, but overseas too) in a cottage industry of big telecom players like AT&T and Verizon supporting certain industry research groups which churn out reports favoring policies big telecom players like, which are in turn handed to Congressmen who receive donations from big telecom players and promote these special interests in Congress via bills and votes.

Industry awards might not be much help either. In this award ceremony, there was a tie between Citrix and Microsoft for Best Small Business Application Virtualization Software Providers – not much help if you are choosing between the two leading providers, who happen to be Citrix and Microsoft, at least at the time this was released.

In the end, outside of asking various reps a lot of questions, you are going to embark on a lonely journey in telecom research. Our advice is to see demos, ask for references, and even go on site visits to customers that have the systems you are considering purchasing. Don’t be shy about asking to try a trial or hosted version of the product you are looking at, there is no substitute for direct experience with a product. And take independent, 3rd party reviews with a grain of salt. There is big money in telecom and not a lot of press coverage, which leads to a lot of raised eyebrows when reports and reviews are tossed around.

Mitel, Shoretel Merger Drama Continues

Mitel and Shoretel will merge... or won't they?

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.

Mitel and Shoretel will merge... or won't they?

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.

Top 5 Tips for Avoiding Phone System Hacking

Phone system hacker jerkface

The NY Times ran a scary article on phone system hacking, which led to a flurry of press about a growing problem in our industry (cell phone hacking, voicemail hacking, voip hacking). The most expensive form of phone system hacking involves people making calls from your phone system overseas to the equivalent of 900 & 976 numbers in a sophisticated kickback scheme, or routing calls on illicit calling cards and services through your phone system. This leaves you stuck with massive international calling charges that you are ultimately responsible for. The NY Times profiled a 6-person company hit with $166,000 of charges in a single month.

Phone system hacker jerkface

It gets so hot, hacking in a ski mask

You can always reach out to us to schedule a security audit if you are concerned about your phone system. Just email cs@teamextenda.com.

However, there are some simple tips that can protect you, and that follow general IT security principles.

1) Restrict international calling. Call your carrier and have them turn it off completely. Most international business people are comfortable with Skype, Google Hangouts, and the like anyway.

2) Require account codes. If you must make international calls, require an account code to connect the call. Call your carrier and request this simple change – calls will not connect until the code has been entered following dialing.

3) Enable alerts. Most carriers will send you a text or email if your usage exceeds a certain threshold, so you know to get involved.

4) Firewall should be on a need to connect basis. Only allow known IP addresses to connect to your phone system. If you have teleworkers connecting from home, enable hot desking to require a PIN to enable the phone or phone app.

5) ‘1234’ is a terrible PIN. Stop doing that. Don’t use default PINs, don’t use 1111, 0000, 1234. Ask your system administrator or Extenda to move to 5 digits or more. Hackers can access your phone system by hacking into your voicemail or conference bridge, so please, use sophisticated passwords. Our systems will lock them out after a number of bad guesses.

Mitel’s Shoretel Offer

Exciting times to be a Mitel dealer in Los Angeles. With a crowded marketplace full of Shoretel dealers banging into each other on every deal, many IT VARs, MSPs, IT and Telecom Consultants, and Telecom VARs and Interconnects are eagerly awaiting what shakes out, if anything, from the Mitel bid for Shoretel.

On October 20, 2014, Mitel (MITL) offered $540M for Shoretel (SHOR), an offer Shoretel’s board rejected. In fact, Shoretel has publicly scorned the offer as financially inadequate and tooted their own horn regarding their recent successes, giving every indication that they were fiercely independent and going to stay that way. Mitel sued them over intellectual property on the eve of their IPO, so this announcement, on the heels of a quarter where Shoretel managed to eke out a positive GAAP (Generally Accepted Accounting Principles) net income could be seen as part and parcel of Mitel habitually raining on a competitor’s parade.

Except, for one, Shoretel hired Blackstone to advise them. This offer comes on the heels of last year’s executive exodus at Shoretel and a wave of insider selling over the last 12 months – all signs that there is something odd going on. We are looking at some weird execution problems at Shoretel lately too – it took about a month to patch the HeartBleed problem on their core systems, and this is still going on – different protocols and phones for premise and cloud.

Odd choice of Phone

Cisco SIP for Shoretel Sky

 

 

 

 

 

 

 

 

This blog post takes a pretty tough stance, noting that the telecom equipment market is consolidating as businesses shift to the cloud and that Shoretel has run at a loss for 16 years in a row. I would argue that the numbers clearly show that Shoretel’s cloud business is getting some traction. The counter to that is that SHOR’s cloud business is of insignificant size compared to 8×8 (EGHT) or Vonage (VG), who combine for a billion dollars in cloud telephony revenue a year. I would add that Vonage has a gross profit margin of close to 69%, and 8×8 runs at nearly 71%. Premise manufacturers like SHOR (59%) and MITL (55%) are going to face some challenges supporting a large premise base while they pursue cloud. I think combining to wring efficiencies and scale out of their operations is going to be crucial if these old-line companies are going to compete with firms with that big of an advantage.

Since Shoretel shares are 83% held by institutional investors, it looks like the barrier to a purchase may be more about price than stubbornly independent Shoretel leadership. This article features shareholders explicit about wanting a price in the $10-12 a share range, versus the $8.10 price of Mitel’s first offer. The stock has been flat for some time, so I would imagine shareholders are excited to see some movement.

So what does it all mean for our customers? If you are considering a Shoretel system, be aware that underneath the tough talk in the press releases, Shoretel hired investment bankers and Wall Street might like to see the company sold, so they can cash out on a stock, and a sector, that has been pretty flat. I imagine Shoretel is hoping for a bidding war to drive the price up, which would be a Pyrrhic victory for Mitel if they take on too much debt, though it is hard to imagine who would want to get in the game ahead of a huge technology refresh cycle about to sweep the industry.