The Next Chapter for ShoreTel

by Dave Michels

The word I use with ShoreTel is Tenacious.

Tenacious: Adj. Not easily dispelled or discouraged; persisting in existence or in a course of action.SHoreTelS

ShoreTel is tenacious because it’s a relatively small vendor, with few unique features and capabilities, that’s only ever been profitable a few quarters, yet it keeps trucking.  ShoreTel is a force to reckon with. ShoreTel is a brand that everyone knows, that customers love, and competitors fear. ShoreTel is the firm that consistently grows share – even when the overall market is flat. ShoreTel is secretly the envy of most of its competitors. It has commitment, passion, drive and raving customers (and partners).

Or at least it did. The future could be different, particularly since it just named a new CEO.

Don Joos was named CEO last week. This is Don’s second promotion in his two year term at ShoreTel. I met Don at the last ShoreTel Champions conference in 2012. We only spoke briefly. He was assuring me that ShoreTel would be unveiling a game changing video solution at the end of calendar 2012 (still waiting). (My thought then was it would be a deal with Vidtel which I think makes sense, but that would not take this long).

The announcement took place during ShoreTel’s Q4 FY2013 briefing call. Once again the firm did well. For Q4, ShoreTel saw its revenue grow 9% year over year, and for FY 2013 its revenue popped 27% to $313.5 million. As a casual point of comparison, Avaya also reported this month and CEO Kennedy explained the 8% decline in year over year quarterly revenue with: “We all know that this is the fourth out of five years that the UC market in aggregate is flat to down.”

Avaya’s quarterly revenue dropped $100 million, that 8% drop is more than ShoreTel’s total quarterly revenue of $85.6 million. These companies should not be competitors – but they are. 

Clearly, ShoreTel’s CEO during this past period should get full credit for a great quarter. That would be Peter Blackmore. He was named CEO in December of 2010, with the unfortunate task of filling the large shoes of John Combs, the beloved CEO during ShoreTel’s formative years of 2004-2010. Combs shaped the company culture to be tenacious and it was he who made NetPromoter a key differentiator. Blackmore is not tenacious. In Blackmore’s first big speech to dealers (Champions 2011 in Chicago), Blackmore promised he wasn’t going to change much. That’s what the Combs camp wanted to hear, but it isn’t a very realistic promise. The CEO must make decisions everyday, that’s part of the job.

Blackmore had previously been the CEO of UTStarcom. These guys make various Internet devices. I bought a UTStarcom Wi-Fi phone around 2008 – pure junk. Before UTStarcom, Blackmore was executive vice president in charge of worldwide sales, marketing and technology at Unisys. Before that he was an executive vice president at HP’s Customer Solutions Group and Enterprise Systems Group. He got into HP when it acquired Compaq where he had held several senior management positions. In other words, Blackmore had no telecom, PBX, VoIP, or UC experience whatsoever. I would imagine it would be quite difficult to manage a firm like ShoreTel without industry experience. In order to break the rules like ShoreTel does, one must know the rules.

The only real hints that this may have been a problem was the string of recent executive departures. This year was quite bad, but it started earlier. The first big loss was Don Girskis, SVP WW Sales, who left in March 2012. Combs and Girskis together left a huge hole for Blackmore to fill which he did with a lot of executives. It was apparent at Champions 2012 with what seemed like a constant parade of direct reports to the CEO.

Without any doubt, the biggest change that Blackmore did was acquire M5. The cloud is the future. Even with the benefit of hindsight, I’m not sure this was a great move. On the pro side, I agree with Blackmore that the big shift to the cloud is real and permanent. ShoreTel not having a cloud play was concerning. M5 seemed like a good fit with its own technology, focus on NetPromoter scores, larger than average accounts, and low churn.

On the con side, M5, now known as ShoreTelSky,  brought with it a totally different business model powered by totally separate technology. ShoreTel is really two separate companies, each with its own channels, marketing, and R&D – both growing quickly and both hungry for cash. The acquisition introduced channel conflict in ShoreTel’s exceptionally pure channel program. Reportedly there is considerable conflict between the two divisions. M5 founder, Dan Hoffman, is among the departed executives.

ShoreTel reported its $66.3 million in quarterly revenue for premises up 3% year over year while its quarterly cloud revenue of $19.3 million was up 35% year over year. If Blackmore had long term plans, I bet they included selling off the premises business in a few years.

So why is Blackmore out? The official reason was retirement, but I doubt he nor ShoreTel hatched a plan to sign up a CEO without any industry experience for a only a 3 year gig. My guess is all these executive departures caused a drop in confidence within him or the board. Insult to injury, two of the execs (Vitalone and Gaines) went  to Mitel – the competitor that ShoreTel loves to ignore and sue. The ignore part was an interesting tactic – “we only compete with market leaders” (Cisco and Avaya) elevated the brand and kept the eye on the prize. Though ignoring Mitel and NEC sometimes sounded like ShoreTel wasn’t n touch with the market.

Joos has his work cut out for him. He needs to establish his executive team, align the premises and hosted divisions, reduce duplication, figure out virtualization on the premises side, and find some profit. All this with the backdrop of increasingly competitive and increasingly similar solutions (both premises and hosted), being a first time CEO, and more competitors going directly after ShoreTel’s jugular by citing simplicity and customer satisfaction.

Despite all that, I feel pretty good about ShoreTel. Unlike Blackmore, Joos not only came from within the industry, but contributed to the current plan. Though he probably needs to tweak it to address whatever made all those very smart folks leave.  The fact that ShoreTel still had a strong quarter suggests the momentum and tenacity goes deep.

ShoreTel makes a big deal about its product’s ability to seamlessly failover in the case of a failure, now we’ll see if that applies to the executives as well.