ShoreTel Does it Again

by Dave Michels

Is it just me or does the word “ShoreTel” keep coming up? There is no question in my mind that ShoreTel is drawing the attention and ire of its competitors. 

ShoreTel is the guerrilla marketer in the industry and its tactics appear to be working. The company is relatively small and light on features, but that doesn’t mean its message isn’t resonating – it is.  The company just posted its quarterly results – here’s a few highlights:

  • Q3 Revenue up to $53.9 million. That is up 22% year over year, but down from Q2 and typically ShoreTel’s Q3 is stronger than its Q2.
  • As of 9/30/11 $109.2 m in cash and no debt!
  • 1,000 customers added in the quarter (300 were over 500 users), representing 123,000 end-user licenses.
  • ShoreTel is claiming its 2Q11 market share of “US. Enterprise IP Telephony Revenue” is 7.2%, ranking it #3.
  • Hired 44 people, and currently has 120 open requisitions.
  • Serving 1000 channel partners.
  • Quarter met guidance expectations including forecasts of 20+% growth.

ShoreTel is sustaining double digit growth and that’s tough even in a good economy. However, it continues to operate at a loss (GAAP and non GAAP). GAAP net loss was $4.6 million last quarter and $3.6 million in first quarter. The company reported a loss of $12.8 million in 2010.

Eric Krapf interviewed Avaya’s CEO last week and it only took seven paragraphs until the S word came up.  “ShoreTel has done a great job” and said they “should be credited with focus.” He also conceded that ShoreTel had taken advantage of Nortel’s bankruptcy and the year of uncertainty that followed, to lure away customers. But ultimately, Kennedy said, “One good quarter for us is more than they’ll do in a year.”  [though it wasn’t clear if he was referring to profit or loss].

ShoreTel’s market share figures (cited as Synergy Research) shows Avaya and Cisco holding 39.9% market share each (2Q11) compared to ShoreTel’s 7.2%. Avaya has much more market share, but ShoreTel is quick to expand the discussion to growth rate. Shoretel believes both Cisco and Avaya’s growth rates were negative last quarter compared to its double digit growth.

The fact remains that ShoreTel is indeed a relatively small company. But it doesn’t act like it. Taking shots at the market leaders is arguably positioning, but the company also added a third distributor. ShoreTel only sells via indirect channels, but only about 20% of its US volume goes through two tier distribution. ShoreTel uses Westcon to service CLECs, ScanSource to service some dealers, and just announced Ingram Micro as part of its vision of being a billion in revenue. Three distributors for a billion in revenue seems rock solid, but they have a ways to go. Last year’s revenue was $200.1 m (up 35%).

Back of the envelope – total revenue was $53.9 m for the quarter – and 12.5% was international leaving $47.16 million in the US. CEO Peter Blackmore stated 20% of its [product] revenue went through distribution so that’s a maximum of $9.4 m ($37.7 m annually) split between two distributors.  I worked in two tier distribution a decade ago, and we looked for $100 m in revenue before considering a new line. Ingram probably has a lower threshold, but to be interested in ShoreTel, it’s got to be expecting some major growth.

ShoreTel is a fascinating story and shows that disruption doesn’t always come from new technology. Sometimes, it is just a new way of solving a problem, or solving it with a higher degree of satisfaction. ShoreTel’s message of simplicity works with end users. I’ve told some clients that you can buy and implement a ShoreTel system faster than you can figure out the quote of some of its competitors. However, ShoreTel simplicity is at risk as the company adds more features and capabilities targeted toward larger organizations. ShoreTel now has collaboration and two solutions for mobile phones, meanwhile competitors are simplifying. Cisco’s new CMBE 3000 is aimed at mid market users and stresses low cost and simplicity – a coincidence?


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