Monday, July 26, 2010

ShoreTel Conference - Final Thoughts

Following my highlight post about ShoreTel’s partner/analyst event last week, I just wanted to share some thoughts about the event and what they’re bringing to market. There were about 15 analysts, and it’s fair to say this was a first for most of us. ShoreTel hasn’t done much outreach like this, so we don’t have much to compare this against. A few of us were spoiled by Cisco C-Scape last month, but that’s a pretty hard act for anyone to follow. Let’s just say this event was on a more human scale, and it’s great that their execs were so willing and able to spend time with us.

CEO John Combs set the stage by talking about the “perfect storm” that bodes well for the company. He cited several stats showing this to be a growing market, especially for UC and contact centers. Supporting this is their product set, strong channel network and an industry leading low TCO. Every vendor will have its own spin on TCO, and nobody wants to be the highest, so you have to take this with a grain of salt. That said, with simplicity being a core theme of the conference, it’s not surprising to see their TCO to be so attractive.

You can draw your own conclusions about TCO, but their customer satisfaction metrics are hard to argue with. With my market research background, I put a lot of stock in this factor, especially when the data consistently rates them ahead of their peers – Cisco, Microsoft, Avaya and Mitel. Equally impressive is their absolute rating over time and how they’ve stayed at such a high level. In every quarter since Q4 2005, they’ve had a 90% or better rating, so they’ve clearly found the right balance with customers.

This is reflected in their strong sales growth, and being a public company, this shouldn’t be news by now. Sales have steadily grown from $19 million in 2004 to the current level of $148 million. Supporting this is a healthy win rate, which sees them succeeding on two out of every three opportunities.

It’s a strong growth story, but there is still work to be done. While the win rate is good, their consideration rate is the weak link. They explain this by saying ShoreTel is only being considered for 3 out of every 20 opportunities. That’s a pretty low rate, so you can imagine how their growth metrics would spike simply by doubling this. So long as they keep a high win rate, improving this metric will yield a very strong upside. I don’t think there were any financial analysts with us, but I have no doubt they will zone in on this one for its impact on the company’s valuation.

This consideration rate is driven by a more basic issue – they simply aren’t a household name like their bigger competitors. One of the key initiatives coming out of the conference was their commitment to investing in brand building. Given their strong growth story, this should be a fixable problem, especially when they seem to have so many happy customers willing and able to vouch for them. As noted later in the conference, it’s much better to have a great product and not be well known rather than be well known with a mediocre product.

Their strengths are in the right areas, and in my view, the weaknesses are largely within their control. Investing more money in marketing is no guarantee, of course, but seeing such a good vibe from both customers and channel partners, there are a lot of people rooting for them. I can vouch for that first hand via the many conversations I had there with resellers – both new ones and long term ShoreTel partners.

Over the two days we were there ShoreTel shared quite a bit more, and overall, I came away with a better understanding of what makes them successful, and a more positive outlook on their chances. In that regard, I’m sure they felt the same way about the analysts, who are probably better connected to ShoreTel than ever before. They spent a fair bit of time explaining their architecture and why it creates more simplicity for both resellers and customers. It’s an important part of the story, but I’ll leave that assessment to the more technical analysts in attendance. I should also mention that most of Day 2 was dedicated to the strategic roadmap – it was quite good, but under NDA, so let’s move on.

Beyond all the detail, the underlying theme of the event was summed up in their tagline “Beat Complexity”. It’s a good mantra, and it’s hard to argue against this. They provided some great examples of how various competitors have lots of complexity, while theirs is the opposite. Again, there’s room for subjectivity in defining “complexity”, but if you can persuade the marketplace that you’re “brilliantly simple” – another key tagline from the conference – you’re going to win more than you lose. Skype is still my all-time favorite example of simplicity and good technology trumping everything else, and I’m sure that lesson hasn’t been lost on ShoreTel.

Finally, I can’t help but wonder if “Beat Complexity” is code for “Beat Cisco”, making this a more subtle way to motivate resellers. After all, that’s the target audience of this event, and everyone knows that Cisco is top dog. ShoreTel is aiming high - why not? – and while Cisco may be better at branding, the takeaway from the conference would be that ShoreTel has a better product. Simplicity is part of that equation, and ShoreTel believes that’s what the market really needs. I think they’re right, and the proof will come over the next couple of quarters. In the past I haven’t followed their earnings calls that closely, but you can be sure I will be now.


Bernard Gutnick said...

It was a pleasure having you as my guest for the industry analyst meeting.

Bernard Gutnick

Jon Arnold said...

Thanks for having me, Bernard!