Shining Through: Little-Known ShoreTel Prepares for Its Big Breakout Role

By Paula Bernier, Executive Editor, IP Communications Magazines  |  October 01, 2010

This article originally appeared in the October 2010 issue of Unified Communications magazine

In reporting its quarterly finances recently, ShoreTel revealed some impressive numbers. 

For the fourth quarter of its 2010 fiscal year, the company – which sells IP phone systems with built-in unified communications and contact center functionality – had $42.2 million in revenue, a record high. That was up 14 percent sequentially from the third quarter of fiscal 2010, and 30 percent from the fourth quarter of fiscal year 2009. ShoreTel also increased record gross margins with non-GAAP gross margins, which exclude stock-based compensation charges, at an all-time high of 66.8 percent, up from 64 percent in the year-ago quarter. As of June 30, it had $116 million in cash, cash equivalents and short-term investments, and had generated approximately $1.7 million in cash flow from operations during the quarter.

As the company continues its effort to grow revenue and profitability, it’s also keenly focused on another number. That number is three.

Kevin Gavin (News - Alert), vice president of marketing, explains that ShoreTel aspires to one day be among the big three PBX solution providers. The No. 3 slot opened up when Avaya bought the Nortel (News - Alert) assets, he says, and markets tend to want three big players.

ShoreTel intends to be one of them.

“We think we are breaking out into that top tier,” he says. “I think it’s a breaking star kind of story.”

Avaya (News - Alert) and Cisco remain the two big leaders in the PBX space. Research firm MZA recently reported that Avaya continues to lead the world PBX market, having grown its market share from 13 percent in the first quarter of 2010 to 15 percent in the second half of this year. It took the lead with the close of the Nortel deal. Cisco holds claim to the second slot, with 12 percent of the worldwide PBX (News - Alert) market share. With Nortel gone, Panasonic has been able to move from the fourth to the third position globally, according to MZA, which says the company now owns 11 percent of the market.

But Gavin says that No. 3 slot is kind of up for grabs, adding that it’s vying for the position against others like Mitel, but noting that Mitel has been struggling lately on a number of fronts. For example, The New York Times called Mitel’s spring IPO – which debuted at a price far below expectations and as of late August had plunged 12 percent from there – a “disaster”. Mitel, which recently reported weaker than expected quarterly results, has also seen the exit in the past couple of months of key executives Don Smith, who had been CEO, and Richard Dell, former president for the U.S.

Meanwhile, ShoreTel has been focused on growing its business.

Synergy Research's latest data reported in the quarter shows ShoreTel grew market share once again in the June quarter to 8.2 percent in the U.S. pure IP market and 5.6 percent of the U.S. IP telephony market. ShoreTel sold approximately 96,000 end user licenses in the quarter, with more than 800 new customers added in that period.

The company is making gains both in the U.S. and abroad by going up market, and winning more and larger contracts.

ShoreTel started out selling to small businesses, but now also has medium and large enterprise users. The target is opportunities involving between 20 and 10,000 users. It recently sold it first contact center in EMEA in excess of 1,000 lines.

International now represents 10 percent of ShoreTel’s business, and that’s growing. The company has seen the best success in Australia and Europe. As part of its most recently reported quarterly financials ShoreTel revealed it had record high international revenues of $5 million – about 12 percent of four quarter total revenues. That represents a 130 percent year-over-year increase.

ShoreTel wins and retains customers by delivering what Gavin says are simple and straightforward solutions to their unified communications problems.

“The whole notion of brilliant simplicity is what we focus on,” he says.

Some IT shops like to conquer complexity, and Cisco and Avaya have plenty of challenges awaiting them, says Gavin. But those businesses that seek easy to implement and use UC solutions should consider ShoreTel, he says.

To help demonstrate that fact, he adds, the company urges potential customers to talk to existing ShoreTel users.

“We have very, very high customer satisfaction,” Gavin says.

ShoreTel also has a high rate of success when it’s in the bidding process for a new customer, he adds. The company, which relies exclusively on its network of worldwide channel partners to get its products to market, estimates that it wins between 60 and 65 percent of the deals for which it is considered.

However, Gavin says that because of its limited name recognition ShoreTel is only able to get its foot in the door for about 20 percent of the opportunities in the market. As a result, increasing its participation in sales opportunities is one key area of focus for ShoreTel, which believes this could help accelerate its growth significantly. To help make that happen, ShoreTel is making a big push to advertise and otherwise promote itself to IT decision makers.

That is the kind of thing that has enabled ShoreTel to post double-digit growth despite the challenging economy. ShoreTel realized a 45 percent compound annual growth rate before the recession hit. Last year during the throes of the recession, the company’s growth slowed to 9 percent. But at the time, about nine months ago, Gavin says ShoreTel (which trades under the ticker SHOR on the Nasdaq) went to Wall Street to convey its belief that the recession would soon end and that ShoreTel would continue to invest in product development and advertising in the meantime – and was willing to lose money for a while to do so – so it could come roaring out of this down economy.

“And that’s what happened,” says Gavin, adding that although the economy is still struggling, the market is stabilizing, and ShoreTel has seen its growth rate move into the double digits again.

The company still isn’t profitable, but it managed to avoid losses in its recently reported quarter, says Gavin. And while ShoreTel continues to pour its revenue back into the company to fuel growth, the company expects to be profitable by the end of this fiscal year, which ends June 2011.

On the product side, ShoreTel recently has invested in enhancements to its desktop application and contact center solutions; a tool to help customers compute and contrast their cost savings with ShoreTel and competing solutions; and a pilot test to look at how it might deliver a managed version of its solutions.

Among the new offerings is ShoreTel 11 with ShoreTel Communicator. ShoreTel has long had a desktop application that enables users to manage multiple types of communications through such features as visual voicemail, find me/follow me, active call control, conferencing, and more. With this release, the company changed the product’s name to Communicator. It’s available in a computer version; a Web-based version that doesn’t require a download (that’s new with release 11); and for various wireless phones (new with this release is support for the iPhone; also available are BlackBerry, Nokia (News - Alert) and Windows Mobile versions).

ShoreTel Contact Center 6, meanwhile, adds to the company’s existing PBX-based contact center functionality new open interfaces so contact center and developers can integrate the solution with other IT applications like CRM. Release 6 also increases the number of agents supported from 500 to 1,000.

The company also recently launched what it calls its Lowest TCO Guarantee Program. Basically, it’s an online tool, which Alinean helped ShoreTel deliver, that shows potential customers not only the cost of ownership of a new PBX in terms of upfront costs, but also throughout the life of that solution, as that’s where ShoreTel believes it excels.

Several ShoreTel partners already use the company’s platform for managed service offerings, but it has been pilot testing a managed service of its own, which would enable customers to pay by the seat per month, with no upfront investment. If all goes as plans, ShoreTel will launch that commercially by the end of the year.

Edited by Tammy Wolf