ShoreTel: Real Opportunity for Upside
- ShoreTel (SHOR) is an emerging provider of IP PBX systems targeting enterprises. The company positions itself as a provider of unified communications solutions and over time will deliver product functionality that integrates wireline and mobile telephony, Outlook and Lotus Notes contact databases, instant messaging and voicemail.
My investment thesis:
- ShoreTel has developed the most flexible architecture in its category, which supports better performance, smaller operating footprint and a faster rate of innovation.
- The company has been expanding its distribution relationships which should result in a significant step up in order rates exiting 2008.
- New products in 2008 should provide a lift to bookings.
- Development & marketing investments will ultimately drive an increase in market share.
ShoreTel’s main innovation was a distributed, switch based architecture that permits enterprises to scale IP telephony capacity without needing to install & manage multiple control units. The switches maintain call routing information among themselves, distribute calls across the network, manage bandwidth consumption and connect to application servers which provide and manage higher level functionality. The system supports a consistent set of features across multiple locations & provides IT administrators a single point of management. the company has also invested heavily in integration with Outlook and call center applications.
The company is operating well and seems to be gaining share during the economic downturn. Revenue in the latest quarter grew 10% sequentially & 20% year over year (which the market grew only 10%). Gross margins remained steady at 63% and significantly, incremental operating margin was 85%, showing the potential leverage in the operating model as revenue scales. The company intends to invest this financial leverage in additional development & sales resources in fiscal 2009. This will suppress growth in operating income, but should translate to a higher revenue growth rate and ultimately, operating leverage in fiscal 2010.
THIS IS A GOOD EXPLANATION OF WHY SHORETEL HAS GROWN SO QUICKLY AND WHY THE TECHNOLOGY SETS THEM APART.ITS ALL ABOUT THE ARCHITECTURE.
