ShoreTel Scoops Up M5 Networks, Posts Impressive Q2 Results

by Gaurav Kheterpal on February 6, 2012

Year 2011 was a mixed bag of sorts for ShoreTel. Though it started off well, its market blitzkrieg hit a speed bump as the disaster in Japan threatened to cut supply lines. Things started to turn around towards the latter half of the year as the IP-based phone service bagged lucrative partnership deals with Tech Data Canada and HP.

And the company couldn’t have made a better start to the New Year – generating record revenues in its second quarter for fiscal 2012, and surprising analysts by reporting earnings that beat their expectations by 400 percent. To top it off, ShoreTel last week confirmed that it will acquire M5 Networks, a New York-based hosted UC vendor, in a deal worth about $146 million.

First, a quick look at ShoreTel’s Q2 results. The company’s revenue grew 22 percent year-over-year to $58 million, and up 8 percent from the previous quarter. Net income was $1.4 million or 3 cents per share, compared with a net loss of $1 million, or 2 cents per share a year ago. Despite the company posting a surprise non-GAAP profit, it was downgraded by equities research analysts at Craig Hallum from a “buy” rating to a “hold” rating.

“ShoreTel’s market share within both worldwide and the United States have grown significantly year-over-year,” chief executive Peter Blackmore said. “We expect to build these market share gains and continue to close the gap between our current number three position and the number two player in the U.S. We also added a record of nearly 1300 new customers in the quarter, a sequential increase of 24 percent over quarter one.

M5 Networks, headquartered in New York City, has been operating in the Unified Communication segment since year 2000. The company is considered a leader in the UC cloud market with more than 2,000 customers. M5’s flagship offerings include the M5 Scribe Voice Mail to Email Translation service, as well as fax, business application integration and a softphone offering. Last April, M5 acquired a call center vendor Callfinity and integrated its solution into the M5 hosted platform.

As for the ShoreTel’s M5 acquisition, the latter’s shareholders will receive approximately $84 million in cash and 9.5 million shares of ShoreTel stock. The move is expected to boost ShoreTel’s cloud capabilities thereby enabling it to offer both cloud-based and on-premise solutions. Post acquisition, M5 Networks will become a ShoreTel business unit led by its current CEO Dan Hoffman, who will become president and general manager of the new business unit. Though the engineering groups from each company will remain separate, they will cooperate and coordinate in order to leverage the innovation and best practices of both groups so that both product road maps will benefit from the combined capabilities.

“The acquisition of M5 positions ShoreTel as a leader in the fast-growing cloud UC market and delivers a suite of hosted telephony solutions that is unmatched in the marketplace,” said Blackmore. “This acquisition is a critical step in our evolution and enables the company to capitalize on trends in cloud computing and advance our enterprise communications strategy.”

Gartner predicts that the UC cloud segment could grow 36 percent, to $2.2 billion, by 2015. With M5 Networks in the bag, ShoreTel will further strengthen its position as a formidable player in the hosted UC segment.

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Written by: Gaurav Kheterpal. Follow TheTelecomBlog.comby:RSS,TwitterFacebook, or YouTube.

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