ShoreTel (SHOR) is a unified communications provider based in Sunnyvale, California. The company provides IP unified communication systems to small and medium enterprises worldwide. Its services are comprised of integrated voice, video, data and mobile applications based on Internet Protocol [IP] technologies. The company provides its services via two channels. SMEs can either utilize ShoreTel solution in their own premise-based data centers, or subscribe to the company's cloud-based ShoreTel Sky communication services. Over the last few quarters, ShoreTel has shown a robust growth in its cloud-based services, as more enterprises continue to adopt the use of cloud computing and services in their businesses.
ShoreTel's cloud business grew by 32% and 35% in Q3, and Q2 year-over-year, respectively. The company also posted positive results in its most recent quarter, beating analyst estimates on revenues and earnings. ShoreTel is up 90% YTD, but is still way below its 2011 highs of a double digit price point, even after growing revenues consistently as depicted below.
ShoreTel has consistently grown its revenues and gross profits, but earnings have been disappointing over the last two years. Nonetheless, that seems to be changing, especially considering the company's most recent quarter results.
Gross profit grew to $51.1M from $45.8M reported in the same period last year, while revenues were up 12%. The company's operating expenses decreased by about $2M, while net loss was down from about $8M reported last year to just over $1M. It was a much improved quarter for ShoreTel as it blew analyst estimates on top and bottom line. Analysts had estimated a revenue of $80.9M, while ShoreTel reported $84.3M. Non-GAAP earnings came at $4M, or $0.07 per share, compared to last year's loss of $2.1M or $0.04 per share. Capital IQ analysts expected the company to break-even.
ShoreTel's unified communications is its strong point for sustainable growth as organizations shift from traditional meeting setup to modern ways of communication. The company facilitates unified communications like audio and video conferencing by enabling the integration of IP telephony solutions with instant messaging, desktop collaboration and video.
Additionally, ShoreTel also provides the required equipment and devices used in communications including IP phones that use an integrated Virtual Private Network [VPN] feature where mobile workers can select Wi-Fi phones that work with the open interfaces of the system. ShoreTel's systems also support a variety of third party phones from leading manufacturers like Cisco Systems (CSCO), Ascom, and Polycom, which it uses in Sky customer deployments.
The company's systems support integration with mobile devices such as smartphones and tablets, which means even as companies continue to embrace the transition to mobile, ShoreTel is well set to accommodate the [bring your own device] BYOD policy in organizations. With this type of technology, it is possible to call, email, text and do a video chat with fellow employees in an office setting using your tablet or smartphone.
In a recent technology conference, ShoreTel's CEO, Don Joos expressed the company's view on the shifting trend in business operations and how the BYOD is affecting the change.
So there is this shift that's happening where the business unit and the end user is having a tremendous amount of influence. I think that has been evidenced over the last couple of years as we think about the BYOD policies, we think about the PCE policies within a company and how the end user now is going to dictate it to IT which device or tablets they are going to use, which PC they are going to use.
In other words, people now want to use the devices they choose in the office, and not necessarily what the office provides. If and when an employee chooses a device different from the ones provided by the organization, then integration into the organization's operations would be paramount. ShoreTel systems are built to support such integrations, which in my view, provide a unique opportunity for the company in terms of outlook.
ShoreTel's opportunity extends to the cloud computing market. In fact, the company's business has grown tremendously in this market over the last few quarters, which based on its business model, sets it up well for sustainable growth.
ShoreTel's Sky operations are well positioned to thrive on the booming cloud computing industry. The company maintains a network operations center in New York, which provides voice and data support around the clock. Additionally, ShoreTel provides technical support including web-based sessions and e-mail support, as well as professional services like CRM Applications integration.
ShoreTel unifies on-premises and cloud phone systems with core CRM, ERP & other business applications. It supports applications provided by some of the leading CRM and ERP providers including Salesforce.com (CRM), Microsoft (MSFT) Dynamics CRM & UC integration, IBM (IBM) Sometime integration, and Sage ACT! among others. This illustrates how the company's systems integrate with various applications used by organizations. Most importantly is the fact it supports business applications integration from companies leading in their respective lines of business, for instance Salesforce.com and Microsoft in CRM, and Sage ACT! in accounting software.
Now with the growing adoption of cloud computing services, by both large multinationals and SMEs, ShoreTel's Sky operations appear well set to capitalize on this trend with its varied unified communications products and services.
ShoreTel currently trades at about $8.60 per share, which equates to a forward price to earnings ratio [P/E] of about 37x. Its current price to book value [P/B] stands at 3.2x.
However, that still remains well below the company's best P/B of about 4.75x achieved in 2011, and again, when performance was worse compared to now.
In other words, if I was to draw two straight lines illustrating the company's performance in terms of revenues and earnings compared to its price, then there would be an inverse relationship. That is not the nature of the stock market. In most cases when that happens, it's usually because investors are foreseeing some dark times in terms of the company's outlook. However, as illustrated in the company's business overview, ShorTel seems to be set for even better times ahead.
Investors seem to have realized that over the least three-four months as the company rallied 54% since August. This to me seems like a correction of the company's pricing, as the market prices in its recent performances, which by all means have been promising. Is the correction over? Absolutely not. There is still a long way to go. Shoretel has the potential to trade at at least 4.5x in P/B if not better; that's based on its 2011 highs, and still does not factor in its promising outlook.
A 4.5x P/B would push the company's price to about $12 per share, which based on its current price of $8.60, represents about 40% upside potential. Now if we factor in the company's promising outlook and the rapid growth in the cloud computing market, ShoreTel has the potential to trade at about low to mid teens within the next twelve months. This means that at its current price level, ShoreTel is only halfway its potential uptrend.
ShoreTel's rally this year may appear to be a deterrent to some investors, as some may think that there is no room to run any more. However, that is just a feeling, which in my opinion does not give full credit to its recent performances.
Additionally, as noted earlier, the company's outlook in the unified communications market continues to improve due to shifting trends in organizational operations. The rapid growth of the cloud computing market also provides a lucrative opportunity for the company, as it continues to align itself with technological advances.
Therefore, ShoreTel is still substantially undervalued despite its rally this year and provides at least 40% upside potential within the next twelve months. ShoreTel could be halfway its uptrend potential, and getting in early is the better option, but it's not too late yet.