VoIP Networking Firm Helps Businesses Get Connected
ShoreTel Inc.
Sunnyvale, Calif.
(408) 331-3300
shoretel.com
Lead underwriters:
Lehman Bros. and JPMorgan
Offering price: $8.50-$10.50
Expected date: week of June 25
Ticker: SHOR
THE BUZZ
While some sectors have been bailing out of the IPO market lately, networking gear seems to just keep getting hotter.
Companies like Limelight Networks, () Infinera, () Cavium Networks, () Starent Networks () and Aruba Networks () are all trading well above their offering prices.
Now ShoreTel, a builder of IP telephony networks, is readying its grand entrance.
If voice over IP makes you think of last year’s disastrous Vonage () IPO, don’t worry. This is a totally different company.
Its networks go to businesses rather than consumers, and most importantly, it has been profitable for two years.
“When you look at an IPO, you want growth, you want a solid technology, you want a great management team, and you want a big market opportunity,” said Tom Taulli, author of “Investing in IPOs” and founder of DealProfiles.com. “This is a company that offers the key ingredients for hungry IPO investors out there.”
Industry researcher Gartner sees the field enjoying a compound annual growth rate of 19% to reach $7.9 billion worldwide by 2010.
ShoreTel, which drew a mere $62 million in revenue last year, has a lot of growing room.
THE COMPANY
ShoreTel was founded in 1996 by Edwin Basart, who still works there as chief technology officer. According to company officials, the aim from the start was to create a new IP telephony system unlike existing options.
The overall goal is to create a unified network that can connect offices and individuals into a seamless system no matter where they are. Abilities that old-style phone systems can only do in a single location, such as transferring calls and messages, can be done anywhere in the network. Employees can also plug their cell phone numbers into the system so they can operate remotely.
ShoreTel’s managers boast that their system is based on switches rather than servers, which reduces complexity and increases reliability.
They also tout the software interface called Personal Call Manager, which lets users see things like how long their voice mails are and from whom, what other employees are on the phone, and where all the members of a teleconference are.
Unlike most tech startups its size, ShoreTel has a highly diverse customer base.
There are 4,500 clients in all, with none providing more than 5% of revenue, coming from both the private and public sectors. Some better-known customers are Robert Half International () and Sharper Image. ()
RISKS/CHALLENGES
ShoreTel is still small, and only became profitable in mid-2005. It has to ensure that operating expenses don’t overwhelm its sales growth.
The company has some pretty humongous competitors, including Cisco Systems, () 3Com, () Alcatel-Lucent () and Nortel Networks. ()
Microsoft () has announced that it plans to move toward a converged system, starting with this year’s Microsoft Communicator that offers functions similar to ShoreTel’s Personal Call Manager.
Taulli says the Microsoft moves are cause for concern, but ShoreTel has a definite head start.
“When it goes into a new field, Microsoft tends to take four or five times to hit it right,” he said.
A recent audit found that ShoreTel has to hire more accountants and beef up its internal controls. If it doesn’t fix these issues in time, it will get in trouble with the federal authorities.
About 92% of revenue comes from third-party resellers, over whom ShoreTel has limited control.
THE RESULTS
Revenue rose upward of 70% each of the last three years, reaching $61.6 million in the fiscal year ended June 30, 2006. The first nine months of this fiscal year have already beaten that with $68.9 million in sales. Net income for the year is up 80%, to $4.2 million.
USE OF PROCEEDS
ShoreTel expects to raise $67.6 million from the sale of 7.9 million shares, or $78.1 million if the underwriters exercise their options. It says it may spend up to $5 million buying an unnamed technology, and the rest for general corporate purposes.
THE MANAGEMENT
John Combs
Chairman, president, chief executive
Joined in 2004 after two years heading Littlefeet and three years leading InterConnect. Previously he held management posts at Nextel Communications, L.A. Cellular and Mitel. He holds a B.S. in engineering from California Polytechnic State University, San Luis Obispo.
Edwin Basart
Chief technology officer and director
Co-founded the company in 1996. Previously he co-founded Network Computing Devices and Ridge Computers, after starting his career at Hewlett-Packard. () He holds an M.S. in electrical engineering from Stanford University.
John Finegan
Vice president of finance
Joined in 2003 as CFO and attained his current position in May. Before that he spent 14 years as CFO of ActionPoint, now part of Captiva Software. He holds an MBA from the University of Massachusetts.