When ShoreTel (SHOR) announces quarterly results on October 27, Wall Street will be asking two key questions: Is the unified communications company still up for sale? And if so, who are potential ShoreTel bidders and buyers?
ShoreTel announced in August 2016 that it was exploring a potential company sale. At the time, ChannelE2E explored 11 potential buyers for ShoreTel's business. But chatter about a potential M&A deal has been especially quiet in recent weeks. One potential suitor, Mitel, has even insisted that it has no interest in the company.
Like many classic hardware and software companies, ShoreTel is undergoing a business transformation. The company has been moving aggressively toward cloud services and recurring revenues. At first glance, that's a smart move. But take a closer look and you'll discover plenty of competition awaiting the company in the cloud market.
A few prime examples: Microsoft has launched a cloud-based PBX integrated with Office 365, and GoDaddy acquired FreedomVoice -- a VoIP provider to SMB customers. Moreover, upstarts like Cytracom are selling cloud-based business communications entirely through the channel.
ShoreTel Cloud Transformation: Progress, Challenges
In some ways, ShoreTel is making progress in its business transformation. More than half of all revenues are now recurring, for instance. But in other ways, the company has actually lost some momentum. A few areas of concern from the company's June 2016 earnings results:
- Roughly 54 percent of the company's revenues were recurring as of June 30, 2016 -- but that's down from 58 percent in March 2016.
- Also, the average cloud-oriented recurring revenue per month was $2,135 in June 2016, down from 2,368 in June 2015.
- Cloud-oriented churn rates also have been climbing, from 4.4 percent annualized in June 2015 to 5.8 percent annualized in June 2016.
ShoreTel Next Moves
During the October 27 earnings call, Wall Street pundits hope ShoreTel can disclose lower customer churn rates and higher revenue-per-customer figures. Improving those two areas could potentially lift ShoreTel's overall business valuation.
As of today (Oct. 24, 2016), ShoreTel's valuation sits at $474 million. Total revenues for 2016 were $360 million, essentially flat with 2015. But those hosted and related services grew significantly, reaching $126.6 million in 2016 -- up from $105.3 million in 2015. The company lost about $4.7 million in 2016, slightly more than the $4.4 million loss in 2015, according to the company's August 2016 earnings announcement.
As I look through all those numbers, my gut says the most likely ShoreTel buyer potentially is a private equity firm. Overall, ShoreTel is not a "growth" company in terms of top-line revenues or profits (actually, net income losses) But those growing cloud revenues could attract a PE firm that wants to take the company private, shed some hardware assets and more faster into recurring revenues, ChannelE2E believes...