ShoreTel, Inc. (NASDAQ:SHOR)
Analyst Day Conference Call
March 14, 2012 04:00 pm ET
Tonya Chin - Director, IR
Peter Blackmore - CEO
Kevin Gavin - CMO
Dan Hoffman - CEO, M5
Pej Roshan - VP Mobility
Don Joos - VP, Global Services
Bill Schlough - CIO, San Francisco Giants
Matt Deringo - VP Business Systems, Brown and Caldwell
Martin Perry - VP Technology Ranstadt Professionals
Scott Chambers - COO Pacific Business Centers
Mike Healy - SVP & CFO
Rick Parkinson - CIO
Lynn Um - Barclays Capital
Sanjiv Wadhwani - Stifel Nicolaus
Steve O’Brien - JPMorgan
Jon Arnold - J Arnold & Associates
Ken Landoline - Current Analysis
Greg Burns - Sidoti and Co.
Hi everybody and welcome, we really appreciate you making the trip out in the rain. For those of you that I don't know I am Tonya Chin, Director of Investor Relations here at ShoreTel. Just have a few announcement and we'll get started. First if you're looking for restrooms, they are at the back and the front of this long corridor. Today we are doing two Q&A sessions. So the first Q&A session is meant for the first three speakers if you could and the second longer session will be for the rest of the content and of course anything else that you would like to talk about.
You have a survey on your desk, so please fill it out and help us do a better job next year and we will of course we are always trying to improve it and as a thank you we have a gift on your way out. So please go ahead and turn that in. And then lastly I do need to remind you that we will be making some forward-looking statements today that are covered by the Safe Harbor provision. Those statements do have risks and we refer you to our SEC documents for a full list of our risk worries factors. And with that I'm excited to bring Peter Blackmore President and CEO of ShoreTel.
A very good afternoon and welcome and thank you for a great turnout on a rainy day. You can tell the English accent and I ordered it specially. Well I know San Francisco needs rain but it shouldn't have been today but nevertheless welcome. We have got a great event and I think you'll be very excited.
Before I begin I wanted to introduce our host, Bill Schlough who is over there and slightly out of camera. Bill is the CIO of the Giants. Go Giants! Also a great customer, a great partner and he will be leading the customer panel later. So many, many thanks Bill.
You see a lot of Mike Healy, myself and obviously Tonya, but I wanted to show off our team, how the work is done by many people in this great company and they are here today. So let me start with the newest member of our team, Dan Hoffman. Dan will be presenting later, obviously the CEO of M5 soon to be the President and General Manager of ShoreTel [X], we will rename M5 as we close and delighted to have you.
Dan has brought three of his lieutenants; Keith Nealon, the head of sales, Eric Raab, the CTO and Jeff Valentine, the head of product development. So you will be able to chat to them at the end of the show. And then Mike Healy, obviously you know Mike Healy. We have next to him, Pej Roshan. Pej was the co-founder along with Tim Olson both of whom are still in the company, Agito. So Pej is the VP of Mobility; Ava Hahn is our General Counsel; Carolyn Gracey who is our Head of HR; and then Mark Arman VP of Business Development and also the Global Value-Added distributors; Rick Parkinson who is our CIO; Pedro Rump leads our Product Development and Don Joos who leads our Global Services; and Kevin Gavin our Chief marketing Officer.
Last but not least we have Don Girskis who is currently our Senior Vice President of Sales and doing a great job. And as you know Don is moving on to pastures new. This is not a surprise to us, it's just the timing was not known until Don made a very personal decision when to start a new chapter in his life.
And many of you who have been like me in business a long while and sometimes you wonder when you’ve finished chasing that Holy Grail, what you do next. Don is very passionate about doing good works and he and his wife are off to Cambodia on April the 14th. So that's a big deal, that's a big deal. So I applaud that, wish him every luck, but just before he goes he’s still got to finish the quarter and finish it strongly.
And by the way before you ask me the obvious question when somebody in sales decides to go to another chapter, the quarter is on track. We always have to do 50% of our business in the first two months till the end of February. We did that, nailed it. We are now down to the last 50% which is all down to execution, the pipeline is there. So I have got every confidence that we will come in within the guidelines we have set, we are on track. So good luck Don.
So the agenda, we put together I will make some, set the scene in terms of what the market is, how we can keep growing. We are very passionate about the continued growth of ShoreTel in the premise market. It's a big deal I will be saying more about that. We are very confident on our roadmap, we understand how to win against the competition and we will explain that in more detail.
So Kevin will talk a little bit more on our roadmap and then obviously the big important news and we close M5 certainly before the end of March. Dan Hoffman is here and we will talk through the whole of the M5 story and why we are so excited to add that to the overall ShoreTel environment.
We then have a Q&A and as Tonya said this is to enable you probably to ask down a lot of questions. We did not want to leave it right to the end, we thought it would also provide a break in the agenda. Then after we come back, after the Q&A, Pej Roshan will take you through Mobility. This is really cool what Pej and the team are doing and we are going to show you demonstrations and capabilities which you have not seen before and then Don Girskis will talk about our other secret sauce which is we have the highest customer satisfaction in the industry and we also measure ourselves on Net Promoter Score which he will explain.
We then have a really cool customer panel and we picked as well as Bill who is a customer and will lead the panel, we picked three very interesting customers. Another large on-premise customer who has just made the decision whether to come to ShoreTel or stay on Microsoft and go to (inaudible). They came to ShoreTel. Another one who is a on-premise solution that provides managed services.
Managed services is a key part of our portfolio, but often the partners do that themselves and this is a very good example of just how you succeed in that business. And then we have an M5 customer, so a pure hosted cloud customer who made the decision to move from Cisco to the cloud. It is a larger -- one-off M5’s larger customers and again I think you'll find a story on how they did it and how they measure it and look at the success, very interesting.
And obviously then we have a longer Q&A after what you really came here to hear about which is the numbers. So Mike Healy is presenting last and we are going to give you the numbers today for financial year 2013 in terms of our model and the following year in terms of model, something the investors at [ShoreTel] were committed to that, more of that later.
So let me now move back to the market. We look at the Unified Communications market in three parts. The telephony part and this slide represents that and then if you expand it, you get the Unified Communications call center. This is the on-premise or managed services market, it's a large market, it is still growing. We are very well positioned in this market and we are passionate about continuing to take share, continuing to grow fast and I will explain why we are so confident in that as I go through the presentation.
But this is our primary business today, will stay a key part of our business and we will win big here. The hosted market is new, it's exciting and growing like a train. We have spent nine months deciding what to do about this important new part of our industry. And we have a lot of experience in technology and every time a cloud or hosted part of the market beginning to become established and start to take off, there is a window of opportunity which if you miss is very hard to ever catch up.
So we started discussing this with our Board in April, we did a lot of analysis, we then had our annual strategy meeting in June of last year and the Board at that time blessed that we needed to get into cloud. You still have a build or buy decision. During the summer, you maybe surprised we talked to 25 cloud voice companies in the United States, not as acquisition targets, but as potential partnerships, how do they make money, what is their secret sauce, what have they discovered about the market, what are the risks and opportunities and we learnt a lot.
From that it became very clear that we should buy, not build. It would have taken us 3 to 5 years to build this capability and it's not just R&D and intellectual property, there is a whole business model change which is very, very different. So we made the decision to buy, we then narrowed it to 9 targets in the September timeframe. Dan and I first met in September, he was attending the salesforce.com conference down in San Francisco and we met for lunch, talked for a long while and then by the November timeframe we narrowed it down to 3 potential targets, of which M5 was actually the strongest and we got involved in very detailed conversations about their model and we also tested M5 with everything we learnt about cloud and hosted businesses.
It's a very different business. You get your obviously revenues and profitability over time. So what you need is very sticky business with your customers, very high customer satisfaction because then it's a very, very profitable business over time. We also wanted a company which had its own intellectual property and we were confident the code could scale. So it was that aspect, high customer satisfaction, high stickiness and then a proven model. We are obviously spending the shareholders money to do this, I wanted to spend it on a company I had confidence in that had a proven model, had clearly it's got scale and was already a leader in this new industry.
And I believe M5 fits all of those capabilities and Dan will do a far better job than I can and talk with you passionately about why he is so excited to join ShoreTel and the confidence we all have in his business going forward.
I want to remind you that although voice is the top of the hierarchy, it’s why we are in the business we are in, we actually sell an important set of solutions to give that full capability. This is where our R&D dollars go in, not just in the switch, not just in the N+1 redundancy capability, but in providing the tools and capabilities to enable this to be a very productive and powerful suite of software.
We are capable of doing mail, not just obviously Microsoft Outlook but with a Mac and Google Mail Systems, a lot of web collaboration tools, very strong instant messaging and presence software, very good collaboration and contact center software and we have high capability video and I will talk more about new things we are doing in video later in the presentation.
The key to this is how much the users really use all this cool stuff, because our feature set is not a million miles away from our larger competitors, but we win because of ease of use. Gone are the days, where you have the luxury of going to the assistants and saying, please can you help me with that, can I do this, explain how I handle this particular aspect.
The modern business person has to be productive and has to have the capability to do all of these things and do it in an intuitive way. Our software is intuitive, it’s very easy to learn it, very easy for people to take full advantage of it and this is the result. You get far more interaction with a ShoreTel system in terms of integration with the desktop, integration with all of the tools behind the Desktop and all the data and capabilities it can bring with anyone else; big proof point.
I do not see that changing anytime soon because we have built our software from the beginning to be differentiated, one set of code, we did not build it by acquisition. So you get complex integration, complex management. It is built right from scratch to achieve just this and that is why customers come to it.
There is also this other aspect, which I think is going to enhance and accelerate growth in unified communications. All of you I am sure are smartphone users, whichever one you have, the iPhone, the Android or the Blackberry. It does matter to us; we have great software for all of those requirements. It is also of matter to us, if for the moment when you use a competitive PBX. We have great software around mobile platform; we work on all of that.
But I would like you to think about the phrase that is on the chart. It is not just about voice. It is about that desktop and desk phone, the integration that you’ve got a desk phone on the go. When I took my iPhone off, because I am making a talk but if I could put it out, I could show you exactly how to use this, exactly how I can access all of the great software as of I was sitting in my desk, find anybody in the company using a four digit internal number. Understand if they are not available and a lot of other assets and is productive outside the office as that can be inside the office.
Happened to be in U.K. a couple of weeks ago and I had couple of board calls, couple of long conference calls. I used this software and I used the Wi-Fi connection in the hotel and I probably saved on those three or four calls a $1000 to the company. Though I got the calls of Wi-Fi effectively free.
So you also have a return on investment for the roaming warrior to enable you to not only have access to all these great tool sets but have that capability. So this I think will accelerate unified communications and give it even more traction and even more capability.
Besides of that we have a lot of loyal and happy customers. And people ask, well what your best vertical? We are very successful in finance, we are very successful in legal, we are very successful in state level government. We are very successful of social media. We are very successful of marvelous sporting franchise, such as the Giants. We have a very, rich, capability in all of these environments.
So let me talk a little bit more about differentiation. Why does this happen? It happens because we have four or five key setting attributes. It is not the function features. We think we are very good at that, but it is the total cost of ownership. You heard us talk about this before. Kevin, after I had spoken will give you more detail about this. We have had our total cost of ownership reviewed by the Aberdeen group just in the last six months.
They have independently reaffirmed the work that we did a couple of years ago that I have talked to you about many times that we have a 15% or more advantage of all of the competitors in this industry. And that is not going to go away anytime soon. We have earned that. Because of the way we designed our code, because of the way we built our systems, people would have to rewrite their code to enable what we do. And that is very compelling.
The next thing is customer satisfaction. Customers do talk to one another, say. I always have their network. CTOs always have their network. For the last eight years what is that measured, the motives for search have put us absolutely the highest customer satisfaction in our industry bar none, consistent every year for the last eight years. We've now moved not only doing customer satisfaction that way to something called Net Promoter Score, which Don Jobs will talk about.
But this is the way Google would have measured customer satisfaction, amazon.com would, Harley-Davidson would. And when you look at the figures that Don presents, I think you will be amazed. We are right at the top of the food chain and that's a hard one and we intend to stay there.
We then have this tag line called Brilliant Simplicity and it captures whatever you are trying to say about TCO and ease of use and customer satisfaction. Interestingly, it’s a tagline that also works superbly in M5, as Dan will explain. It resonates with customers. It differentiates us and enables us to win, more than 50% of the time.
We also have the industry analysts looking very hard at what we do and you’ll also see later on Gartner chart for how they position us and we are unique of standalone and the only one with a strong positive in the small medium business market, which again differentiate us. And customers pay attention to that. Gartner has also just recently evaluated the hosted market and Dan will talk about that. But again they’ve positioned very strongly. One of the reasons we looked at M5 was such an important potential partner for us and then consummate the marriage.
So differentiation is here to stay. It is up to us to execute well. There are not many companies have that many lovely advantages, we just have to execute well.
So let’s talk a little bit about why it can’t change. The competition is good. We have great respect for our competition. The Cisco and Avaya would have to jump through hoops to change TCO capability, very, very hard to do so. We have Microsoft Lync, that’s new again in town, great function feature set for us. One our customers who explained, if you want to compare apples with apples and do a complete TCO evaluation and get an N+1 redundancy and have a voice system that is always there, very expensive.
So we feel very strongly that the competitive landscape where you have to work hard every day and win every day, we have an inherit advantage. We aim to keep it.
Hosted, changing subjects from on-premise back to Hosted, it’s very interesting. An on premise when the ShoreTel founders like Ed Basart started the company and he is still our CTO today, they knew that they are entering the market where they could win if they did all the engineering and everything else right, but then always be a big competitor, and bit better. When they started I was this way, they are now two, it is two of them combined.
The interesting thing about Hosted is there is no big competitor. None. Also people could have potential NAV, but M5 already stands out as one the leaders and we think with the combination of the new companies in doing the right things and leveraging the joint R&D is a huge potential for us to be a leader in the cloud industry, because the space is wide open.
So the challenges continuing to grow. Let me talk about the on-premise and talk about cloud. On on-premise we have a very rich feature set. We have ShoreTel 13; it is in Beta test now, it going to help us a lot more with SIP functionality.
We have ShoreTel 14; about this about this time next year it will come to the customer and it is already in Alpha. When ShoreTel 14 starts to get some huge additional advantages. You heard the news today about one of our competitors potentially buying Radvision Prep out today. That’s not been formally announced, but there are a lot of rumors out there. We decided when we looked at our strategy meeting in June I that partnership was far better solution. As a smaller company we want to leverage these partnership goals, so in ShoreTel 14 we have built interoperability. So from your desktop video system, you can interact with a room size Polycom or LifeSize system and get that in direction; complete interoperability very, very good functionality. So that is part of ShoreTel 14.
We also get a lot of new diagnostic tools. Why is that important? As the customers increase the footprint, increase the size, occasionally you get challenges, is it a ShoreTel system, is it something new in the network; and those of you who are experts on this would absolutely get that. Our new diagnostic and management tools in ShoreTel 14 enable much better analysis of, look this is really a network issue, you need to work with a carrier or look at some other aspect as well as us understanding that helping the customer, giving them counseling support to make their overall environment much better.
We also have a brand new series of phones coming out all SIP enabled; good margins on the phones, good capability, further growth potential. We have Call Center 8 coming out in the similar timeframe with new solutions enabling chat as you go into the call center, enabling better connectivity, better functionality.
So what I am saying here, without going into too much detail, is the roadmap is rich and we grow it, but it doesn't need huge investment any longer. We’ve done the work on ShoreTel 13 and ShoreTel 14 is very advance; we know what 15 is going to do, so we could start showing you real leverage in R&D as a percentage of revenue. Also courtesy of the M5 addition to the family the equation changes; once that is complete, we have 16% next financial year of R&D as a percentage of revenue.
One of the benefits of hosted is you need a less heavy R&D environment. You are not responsible to every operating system over the last three or four years. You have one operating system. It’s in the cloud. You update it. It’s always best. So it’s a less expensive R&D model. The combination gives us that leverage and plus and I want to emphasize this, we’ll keep investing the right way in R&D, but we don’t need to invest much more. So the leverage in the on-premise model is absolutely there.
We know that as we expand you’ve got to increase our support and capability. Don Joos is in charge of that, was very good at it, but that goes into cost of goods sold. So it doesn’t change the leverage model and our margin model in cost of goods sold has been consistent. And we got a long-term margin model which Mike will talk about is very competitive.
So leverage is then, how you increase sales and how you increased lead generation. We have looked at the sales increases over the last three years and there is a very strong correlation between adding people, successful sales people and revenue. So we have very high confidence in that model and how we manage it.
We’ve also built a model for lead generation and the investment you make, the number of leads you have and [Gary Deutsch] is a fully qualified leads when given him the channel and making sure those leads turn of revenue. It’s a very, very clear model. So we can dial this up. We know what’s going to happen. We can slow it down and know it’s going to happen. So our objective is to make sure we get that equation right and have strong growth in the on-premises business.
In the hosted business, M5 has proven the ability to grow like ShoreTel faster in the market in last few years. The market is going to expand about 28% or 29% this current year, financial year ‘12 and then beyond that it’s going to expand 30% plus for the foreseeable future, about 35%. We know that with the M5 capabilities we can meet the growth expectations we need from that company.
We also have revenue synergies which will be modest in the current year, because we’re just integrating the companies once we close at the end of March, we’ll really accelerate as we go forward and in financial year ‘14 get strong.
What are those new revenue synergies? We have been careful not to get too far ahead of the game, but the basic ones, which we put in our model, are very straight forward, very able to get them fast and have high confidence. One is in ability and Dan will actually demonstrate that.
The two companies liked each other so much that even before we did the term sheet definitive agreement, Dan said to us, can we please look at your short-term ability code, he did respect the full holidays and Pejman Roshan went over there and talked to the team and helped them understand and he said, this is the best mobility software we’ve ever looked at and we’ve looked at everything.
So he will demonstrate today short-term ability and he’ll talk to you when the release is; the demonstration is earlier today, the release date is not far away; that’s one synergy. Another synergy would be first, to use a competitive platform today and we are very happy for the customers that they have to continue using that platform, but obviously it will be foolish not to have our own platform either.
So we are going to put an interconnection with our new series of phones, the SIP series of phones and have that available and that would be an additional revenue stream. And, the current revenue stream is not really in that model, because what they do is they ask partners to provide the competitive phone to their customers and the revenue doesn't really flow into M5. Obviously, with a ShoreTel phone it will flow into the company.
We then have another simple synergy, lead generation. We are good at focusing and finding those leads. Today, a percentage of those leads say we want hosted and obviously people look at our website, but they are not quite sure and they just ask anyway. And it’s very difficult to turn somebody who wants hosted into on-premise and just as vice-versa. So those of you, those leadings now would be put quietly away, forgotten about, now they’re going to go straight to the M5 sales organization.
And the last one, something would have taken M5 a long while to build, that its access to our partner communities. And honestly, we couldn’t say too much to our partners anything at all, until this was announced, when we did the definitive agreement. Their reaction has been very interesting. They said to us, gosh, we didn't know you were going to do this. You absolutely acquired on cloud and hosted and we were starting to evaluate which company we go to as a potential partnership for that part of the market, because the partners like us were seeing this is beginning to take off, state and the local government, the example, we've got tremendous presence in state and local government. You take this particular state we are in today. There are about 140 significant cities in California. We have a 100 of them, of the 140; 100 of 140 using ShoreTel.
We know these people well, but some of them are saying what about curve. We still have increasingly RFPs coming in, we couldn’t really think about it as I said. So we could see this taking off. So the lead generation is a part of that and the partners that wanted to have hosted are now peering at M5 store. We haven’t formally announced an official partner program, that’s still on their program, while this we formally announced it as soon as we close, but the partners have already signed a number of our partners up. When I last looked there were 21 actively talking to the M5 team about taking that solution without any encouragement from us; always acting on their initiative. That’s another proof point.
So these revenue synergies will help the financial year ‘14. It gives us great confidence about M5 model, not just from the basic market and their abilities, but the added benefit the partnership will bring. So I am confident at M5’s part. I am confident in the on-premise part.
The issue on the table and you said this to us very clearly, is where is the leverage at our on-premise part. We’ve had great growth. We had five quarters of 30% plus growth. We then had two quarters of 22% plus growth. And as you know, we have to guide down this particular quarter, because that growth is just not there for this particular quarter.
But we have no doubt that by making some straight forward changes to some of the sales, where the sales people go, what they do; we can get back to that 20% growth. We gave you some examples on the last earnings call and we said we have done a great job of ramping new partners; 200 in the last four quarters and that’s a major number for a small company like us, 200 in last four quarters. We have not done such a good job in ramping the revenues there. So we’re going to reallocate some of the resources, put them onto ramping revenues and we have also changed some commission plans already to enable that behavioral change to happen.
We also, Dan and I are planning some additional changes which we’ll announce at the end of the quarter, once we’ve completed this quarter; we don’t want to disturb sales folks in the middle of the quarter to further accelerate growth and get assets and resources that are positioned. There is no perfect sales model ever and you have to tune it every time and that is what we are doing. And we are standing here today committing to you, saying we will grow at 20% on the on-premise business next financial year, 20% plus.
Mike Healy will give you the models, but let me wet your appetite. So as a company we can produce 3% to 5% operating profit next financial year and the year afterwards we’ll have $400 plus million revenues and we are looking at 8% to 12% operating profit and that is beginning to get interesting and then longer-term obviously, we can do even better than that.
But what we wanted to today very importantly is show you the confidence we have in our business and the management of it. Also, as I said to a number of you, we will manage M5 as an independent business unit.
So our sales force and on-premise will be absolutely focused and targeting that, the M5 sales force under Keith Nealon will be absolutely targeted and focused on hosted. We will share leads, we will collaborate, the R&D teams can leverage just like that mobility software I talked about, but we want world-class execution in both areas and all my knowledge of how you do that, where you have slightly different business models and slightly different ways of paying the organization is to manage it that way.
So I see no distraction to the on-premise business, I see no distraction to the hosted business, I see complementary growth with hardly any cannibalization to accelerate the overall company's success in the future. So I hope you are as excited as I am at the end of the day. I feel passionate about this, made some bold moves, but we have built up the great capability. The other thing just before I finish, I’d like you to reflect on the changes in the channel model, we are really getting much more mature. We made some huge changes in the last 12 months. We added two-tier distribution in the United States, we strengthened the team in service providers, we added a lot of horsepower between what we call national partners like CDW, Black Box. We have some of our larger goal partners now by acquisition and organic growth like Transcend becoming national partners.
So we know how to build a channel which is a long way from the channel that ShoreTel started which was a lot of smaller, but very loyal partners to a world-class channel. We have kept those smaller partners, they’re now engaged in two-tier distribution, but we are building up that engine of horsepower along with our sales force to enable that growth.
This is a great time to invest in our company as I have done independently very recently as some of our board members have. So I would encourage you at the end of the day to think about everything we have said and what my colleagues will say and look at us with a hopefully fresh new eyes and the same excitement that we have. With that, my pleasure to hand over to Kevin Gavin, our Chief Marketing Officer.
Alright these sure are exciting times with dynamic change and as a challenger brand, change means opportunity. And what I want to do today is talk some specific things about the ShoreTel premise product in particular, some of its recent innovations and some of the upcoming innovations, some of the roadmap put a little more meat on the bones of what Peter talked about as well. Dan Hoffman is going to talk more about the M5 product and its roadmap and its development, but before both of those roadmap discussions, I want to kind of pull back a little bit from the details and look at the long arc of the category evolution and kind of put the whole product evolution inside of that context.
And if you think about it, the enterprise category started out back in the mid-70s when Nortel effectively introduced the digital PBX and for 37 plus years, that category have had a longer run, surely that category has slowed down substantially. There is really no more new purchases of TDM equipment, but still there is robust sales of add-on equipment to existing TDM deployments. It was around the year 2000 that really Cisco introduced the concept broadly of the IP PBX, they really did it through a series of 26 different acquisitions. It started with Selsius in 1998, is when Cisco really entered the PBX business and leveraging their strength and networking to create the IP PBX category.
Along comes as well Avaya and Avaya was leveraging its networking and its telephony capabilities in the TDM world and they IP enabled their legacy technology and they created an IP PBX as well. Now this is a point where ShoreTel was born. ShoreTel did not have any horse in the race in the traditional PBX world, it really invented itself, it became founded in the IP world. And as Peter mentioned the opportunity to create an IP PBX on a clean sheet of paper, no legacy technology to bring forward, not a series of acquisitions, but a cohesive, complete IP PBX solution from the beginning that really does live up to the Brilliantly Simple tagline.
And as a challenger, we are a very aggressive company, we make no apologies about that. But at the same time we're realistic and we are respectful of our competitors. Cisco and Avaya are fine companies we covet and frankly we attack their market share and we acknowledge and we respect the fact that they are technically powerful companies. They have got deep technical resources. So when a customer gives a set of requirements to either of those companies, they are quite good at putting the resources to bare to satisfy those requirements.
The challenges that in almost every case and inevitably, those solutions they come out with are fundamentally complicated. They require sophisticated technology expertise to run and maintain those systems and that's not something that they can just decide to engineer out. It is part of their core DNA and it's completely separate and distinct from the ShoreTel Brilliantly Simple approach.
So in a three-horse race in North America where we think where we are the three top players, ShoreTel is distinctly different, uniquely different because we truly are substantially simpler and easier to operate. I am going to talk about that later, but it is very distinctly different than the Cisco and Avaya approaches and you will hear from customers as well to help understand that fundamental difference.
And as a result of that fundamental difference, ShoreTel has continued to ramp revenue. Peter talked about 35 plus from five quarters, 22% a couple of quarters past that, that we continue to ramp up revenue, we continue to have a very high win rate and we continue to capture market share. And the other thing that is kind of interesting as a challenger brand, as the small guy among the three, we have lots of headroom. There’s lots of market share left to capture, so we are very enthusiastic, very committed and certain of our ability to continue capturing share and to continue satisfying customers and continue to drive accelerated revenue in this category and continue to be a high-growth machine in the IP PBX category.
Now in addition to that, you have to be asleep if you don't notice the emergence of another category in a similar space and that’s the whole concept of the cloud or hosted PBX. Now this category like the IP PBX has been going on for 10 or 12 years, even M5 has been at it for 12 years back to 2000. This category frankly has grown more slowly than the IP PBX category did. To a large extent, it was constrained by earlier concerns around the cloud, is the cloud going to be reliable, am I going to put my telephony on the cloud, what happens if my LAN goes down, what are the implications if I don't trust that cloud.
And secondly there was a renaissance on many IT buyers perspective saying I'm not sure if I'm willing to trust my core telephony business to a third party. I don't feel good about outsourcing it. I want to own it, I want to operate it, I want to touch it and feel it, I want to know that I'm in control of it. And so to some extent, those issues have held back the accelerating growth rate of the cloud. However what we are seeing now is this business over these 10 years has ramped up to the point Gartner calls it a $700 million category globally and the next four years its compound annual growth rate is 36%.
So clearly those concerns around the cloud are going away. In fact there is a great embrace of the cloud generally and the idea of taking your telephony or taking your services as a service rather than as a purchase, those concerns are clearly diminishing and as they diminish we are seeing an increased acceptance of the whole idea of the cloud telephony. So as Peter mentioned, part of the strategic planning process, we determine that they really were complementary categories that most buyers are predisposed. Our experience is that some people you know just don't trust the cloud, they don't think they are ready for it and they are hardcore premise-based buyers and that's who ShoreTel has been selling to.
Those people that have been embracing the cloud, ShoreTel hasn't been able to sell to them because we haven't had a cloud offering. On the other hand, there are other buyers who are very much embracing the cloud, very much inclined toward the cloud and that's what they want to buy and they don't want to hear about a premise-based solution. So they are very, very complementary. We decided we wanted to have both and it’s really kind of important and we think it gives us a strategic advantage because many companies if you only offer a premise, you naturally diss the cloud right, right the cloud is no good. Or if you're a cloud company, you naturally tend to diss the premise and you lose a little bit of credibility in your ability to talk to customers about the difference.
And so we decided, we wanted to have both. We wanted to be able to tell customers there is a good answer on-premise and there is a good answer in the cloud. Tell us about your needs, tell us about your biases and your preferences, your requirements and we will help you get to the right solution and whichever one you want, we are happy to guide you, but ShoreTel is really the only company that has a really strong aggressive offer in both categories pure play where we can say yes to cloud and we can say yes to premise.
And so we clearly wanted to pursue that strategy, that was what was laid out, that was what Peter and the Board directed. We looked at the category as Peter mentioned, we looked at a lot of companies and the truth is in this category there really is no market leader. Right there is no Cisco out in front, there is no Nortel in front, it's an awful lot of players chasing after the same goal and we looked at it and among all of those companies, we identified M5 as clearly the one that seems to have the best opportunity for ShoreTel to base its cloud solution on.
So we met with and Peter tells the story and now you all know we are in the process of finalizing that acquisition and M5 is about to become ShoreTel’s cloud division. We are ultimately going to retire the M5 name and it's going to be completely branded ShoreTel, that will transition over time. In the meantime it is ShoreTel's cloud division and we are very, very enthusiastic. If you think about, you'll get to meet Dan here in a minute, but Dan and his team has got a terrific management team with 10 plus years slugging it out in the trenches, learning how to build the solution, acquire customers, satisfy customers, drive revenue.
So what more can you want than a company that’s able to do that. Also importantly M5 owns their own technology right, they are not a BroadSoft shop. So there is not that BroadSoft tax going out every time they add a customer. So from an economic perspective, we own the technology and economics are far better and secondly we are able to innovate. They own the code and so you don't when you have requirements, you don't go to your vendor and say please develop this which the customer wanted and wait for them to give it to you and they give it to all your competitors at the same time if that's what happens if it is BroadSoft.
That's not what M5 does. M5 have their own code base, so all the innovation that happens on the M5 platform is no royalties they have too pay to the BroadSofts of the world and no need to give up that intellectual property, the ability to have proprietary innovation that we own and we keep and we drive forward. So it really was sort of a fabulous opportunity, it was exactly what we were looking for. And as we look forward in this category, we think that all categories tend to sort out with a market leader and then also companies come in behind them and we think it is interesting.
This category is not sorted out yet and we think that with M5’s current capabilities, product execution, everything its got combined with the ShoreTel brand, which now stands very much for really simple, reliable telephony in addition as Peter mentioned our lead gen machine, the ability we have with our substantial LEAN flow, the technical synergies that exist between bringing in mobility, bringing in phones, bringing in some conferencing capabilities, our Desktop client, we have some very, very strong technical core competencies that we can flow right in to the M5.
And then also to think about, it’s not a roadmap issue but if you think about it in the future, the opportunity to have some hybrid executions where perhaps a customer might buy a Premise-based solution but maybe they would subscribe to conferencing. So they can be both, right, it doesn't have to be one or the other, or perhaps on an M5 side the customer subscribes to a host of solutions but maybe ShoreTel creates an appliance that can be placed at the Edge for Edge survivability and reliability to connect into the PSTM.
So we've got some time. We haven't even closed the deal yet to work the roadmap but we see lots of cross synergies in a complimentary nature of the two businesses and we think that's its entirely possible and in fact we think is ours, we think we have the inside track within this category. ShoreTel pops up from among the many companies that are contending and if we can take that lead, tremendous advantages flow to the market leader.
So if we can and when we do, pop among the rest, then we get more visibility; more visibility more customers; more customers, more revenue; and that includes our R&D and that means channel partners, etcetera, etcetera. So we bring to bear our child relationships, our brand, our lead gen, and our technology to really continue to compete in this category aggressively but also to take the leadership position in this category as it emerges. And this is the category we see going forward growing at 36% compounded annual growth rate and this becomes a very large revenue stream and a very big part of ShoreTel’s aggressive growth path going forward.
Certainly there is going to be others and we see the Telco’s and Indy’s are certainly going to compete in that category. They are not going to go away but we think kind of like salesforce.com did to the CRM industry, Oracle and Siebel and Microsoft plaguing that space, but along comes salesforce, establish themselves as the leader and leaves Oracle and Seibel in second and third place.
Similarly when we grabbed first place, we think these other companies are going to come behind. They are not going to go away, but we really believe that we have the opportunity to be the number one leader in this hosted cloud space and we think we are on the inside track to get there. And the combination of M5 and ShoreTel is what’s going to make that happen.
So with that I think again I am going to let Dan talk more about the specific M5 and cloud kind of road map situation, but I want to kind of pull back now to the ShoreTel Premise-based business and talk a little bit about the this brilliant simplicity. It is kind of mysterious. I am going to try and demystify for folks, who are kind of really day-to-day living. What is it about ShoreTel, how do they get these raving fans? Is it a Kool-Aid or is it real. I mean how was it that so many customers love ShoreTel and how is it that it is so brilliantly simple?
So I am going to kind of put in the roadmap in the context of the overall ShoreTel solution. And effectively in the Premise-based model what basically happens is that the customer buys their phone service from the phone company. It is delivered with the edge, with the PRI, an analogue line, its highly standardized, its highly reliable and the customer buys phone service from in the phone company and then they buy some gear to put on-Premise to work with that phone service and that’s the typical classic Premise-based PBX model.
So in ShoreTel’s case, we basically have the brains of every ShoreTel deployment at the HQ server and it runs ShoreTel Director. That’s the intelligence of the ShoreTel system. Essentially it runs on a standard 1RU rack unit, it racks up in data center and it is a simple standard off the shelf server that runs the ShoreTel software. Now it can be a physical server off the shelf as you described but it also can be a virtual server.
We fully support virtualization. One of our competitors made lot of noise about virtualization, we have been supporting virtualization for many years and today we are a fully certified with VMware and tested with VMware Ready on VMware 5. The latest release of VMware and that today we know of 1700 ShoreTel customers today that run their ShoreTel Director on a virtualized instance of the HQ server, in a VMware platform. So 1700 customers today are using VMware with ShoreTel and that believe it or not it is in 26 different countries and that’s not where the end users are, that’s where the VM ware platform is. So the end users are even more countries then that.
So ShoreTel has long since embraced virtualization. We have very strong credibility and capability. It is a standard deployment model for larger customers to run the ShoreTel Director on a virtualized instance of the HQ server. So it is equally happy standardized physical server or virtual server and that represents all the administrative interface, that’s where you do all the programming, add moves and changes, any administration, any new software loads happen inside of that. Also that runs the database that is the call routing tables, that’s with the voice mail, the auto attendant; it is completely capable platform that completely supports virtualization.
But there is a second piece of every ShoreTel deployment and that is a ShoreGear switch and essentially this is one of our ShoreGear switches. This is the purpose-built appliance running an embedded wares, it’s running VXworks. There is no Microsoft packs, there is no maintenance upgrades and then patches and all that nonsense goes with it. It is no OS to be managed here and effectively it is a sealed appliance. You put in power, you plug into the network and it really is a gateway between the PSTN. It connects up the PSTN, that's where the T1 are the PRI goes in and then it also connects up in LAN and that's where you put on the phones. So it ends not administered anywhere except inside of Directors. So there's a zero administration burden for each one of these appliances you add in the network and of course the phones connect in on the other side.
This here is an IP 655, the latest and greatest ShoreTel. It’s a large color screen, touch screen, it’s a great speaker microphone, which were known for high quality, it actually works well in conference rooms as well as executives and as Peter mentioned next year we have our new line of telephones, and line of phones, all of them are 100% SIP. No more MGCP in the future ShoreTel phone lines. We fully embrace SIP and the new phone that are coming on next year will all be SIP.
In addition we also have on deck a DECT wireless phone that is a two-line appearances, so the adman can go to copy room or run around the building, still have two line appearances, get their call, still monitor the boss’s lines. So they are fully functional, ShoreTel wireless phone for inside the office. That's also coming next year and so we've got a great whole line of phones.
Now the beauty of these switches is that, they are independent and they are like Lego blocks. So you simply, if you add capacity, you add more. Each of these switches can support a T1 on one side and can support 220 phones on the other side and so six there, each phone represents 20. So if you have more users, you simply add another appliance at half width, add more users. Another, more users, another add more users. So you can keep stacking up these zero admin appliances that are purpose-built for reliability and low cost and just simply keep adding users. There's no administrative burden. You are not allowed to program in these things. You only go into Director and that's where you manage and administer these things
The other thing that’s interesting about ShoreTel in terms of reliability. These are, highly reliable. There is no spinning media, its only moving part of the stand. So it’s really built for 10, 12-year reliability but in the unlikely event of failure, you simply pre-position an extra N+1 switch. So, if you got 4 switches, you add a fifth and if for some unlikely event, one of those switches would have failed, the call stays up. When the person hangs up, they re-register at the other switch and the customer or user doesn’t know what happened. So not only are these reliable devices but N+1 reliability, gives you a very low cost way of achieving very high availability.
The other real genius of the ShoreTel solution is that these switches don’t know and they don’t care where they are located. So whether they are across the state or across the country or across the pond, you simply plug in these appliances and plug in the phone and again, zero administration. All the administration happens in the one single-image in the HP server and it’s a web-based administration.
So no matter where you are, you can get administrative right because people wanted to add users or you can maintain administrative rights essentially if you like but it’s a single system and it just continues to work. It does benefit from the WAN. You plug the WAN in and then effectively the HP server gives out and programs the instructions to each of these switches. They the operate independently.
Also if a person want to make a call on net, the Sacramento person wants to make a call to London, the call is over the WAN as opposed to the PSTN, so there is no cost. It’s cost saving but the ShoreTel PBX does not rely on the WAN. It leverages the LAN but it doesn’t depend on the WAN for call processing. So if the WAN were to go down, which unfortunately is all to often is the instance and it doesn’t have the reliability of the PSTN, you can still make calls because effectively this appliance is a fully self-configured, full call control even have versions that run voicemail, auto-attend and work groups. So even if the WAN is down, the PBX stays up and running. So it’s highly reliable and customers love it.
Now in addition of that, we have been talking a lot about voice, but as Peter mentioned the voice is really moving more towards UC and ShoreTel again focused on how do we solve UC and how do we make it brilliantly simple, because that is our montage. Everything we do with it is about being brilliantly simple. So we’d introduced a product about a year ago called conferencing and collaboration. So this effectively is another purpose-built box from ShoreTel and this is what we call a SA100 service appliance 100. It is a purpose-built box, service appliance running Linux, no Windows tags, and you simply add it on to the network and its discovered by Director. There is no administration, there is no extra user name, there is extra programming inside of Director. It is just like you do voice mail, you check a box and you get people conferencing. You check another box and you give them desktop sharing and check another box you give them instant messaging.
So zero admin burden, high reliability, low cost. And not only is it zero admin and brilliantly simple for the administrators, the IT shops but from the end user perspective the users use the same, familiar, communicator client on the desktop and they already been using for the visual voice mail, for the call control that they use everyday and inside of that is how they then also manage their conference calls, their desktop sharing and their IM. So brilliantly simple for the administrators, brilliantly simple for the end users, and low cost, high reliability, well all unified communication made for the masses and that is why, so many people are adopting Unified Communications at the ShoreTel level.
Now beyond that another innovation certainly Peter mentioned mobility. Another ShoreTel mobility router, another dedicated purpose-built appliance its actually tied into the PBX. And it is PBX friendly, so it ties and certainly the ShoreTel and it is optimized ShoreTel but it is equally well, it ties into Avaya or Cisco PBXs, and we have many deployments with both Cisco and Avaya with short-term mobility and it works just fine.
Essentially, what it does is it let's you download on your smartphone an application from the app store, whether its an iPhone, an Android or BlackBerry, you download an app onto the phone, Pejman Roshan, is going to give a demo later so I won't spend too much time, but essentially it makes that smartphone a fully functional extension of a PBX.
It’s not about some call forwarding trick that any PBX can do to make your phone ring, it merely becomes an extension to PBX. Not only can you receive calls, but you can make calls from that applications and as Peter mentioned, its brilliantly simple and that the end user doesn't know and doesn't care, but it links up both the Wi-Fi or cellular whichever one it finds, its biased towards Wi-Fi but if it can't find Wi-Fi, it goes to cellular. The user doesn't intervene, it happens in the background and you simply use the application to make your calls and when you do it from that application the call actually goes to the PBX.
So your outbound caller ID is your business number which is really important if you trying to get through to people who are recognizing your ID and screening the call based on what that ID is. Also if you are driving down the street and calling Australia, the call goes through your PBX with those good low negotiated rates or through the WAN as opposed to the $1 to $2 minute cellular rates; its tremendous cost savings and tremendous benefits to have your effective PBX in your pocket.
And so when somebody dials your number, the phone, is there some sacramental user, your phone on your desk rings and so to does smartphone and so when you make outbound call, you have all the resource of PBX, you even have reporting, you have presence that all of those things that people are coming to take advantage of, all show up when you are on your ShoreTel Mobility plan, but it wouldn't happen if you are using your cell phone.
And lastly, contact center is another very important element and here again this is an integrated part of the ShoreTel solutions. Its managed once again indirectly, so that all the administrative interfaces, again it’s checkboxes to enable agents and as well from the agent perspective, again its communicative that you are logged in to the same communicator that all your users use, it just adds other capability where you can log on to your work group and you are queues. So again its very fully capable, co9ntact center solution that’s brilliantly simple for the end users, brilliantly simple for the administrators and low cost and highly reliable. So we have got a very, very great contact center solution that’s fully integrated into the ShoreTel solution.
So that’s basically, I forgot about one thing along the way on the UC and Peter mentioned it briefly. On the UC side, the other part is video, it’s important and that we don’t go out and try and create our own video solution. We partner. We have got a very strong partnership with Polycom and the upcoming release later this year; today we have the ability for video to how can you communicate on communicator. Later this year the communicator will be able to reach out and join in the video conference with room systems made by Polycom and even by LifeSize as well.
So now it suddenly becomes, from my communicator client, I cannot only video with other individuals, but now I can join into a Polycom room system; I can join into a video conference at a LifeSize room system and so it’s a very, very positive thing and again part of our overall UC and it’s not about us trying to develop our own video solutions, but taking advantage and partnering particularly with Polycom who we have got very, very good relationship with.
So I want to move here quickly and kind of move through a couple of things. When we talked a lot about total cost of ownership, we got this total cost of ownership tool which is like a secrete weapon. We take it to the customer. We say don’t believe us. Let’s put your situation, your configuration, your number of users, your number of locations and exactly what your competitor alternative is and let’s look at the total cost of ownership. And so it’s a programming tool that our sales people and our partners use.
And recently we have had really good validation from Aberdeen Group. Aberdeen went out and surveyed 260 some users and ask the users, how many, this is a one element, system management cost. How many full time equivalent admin does it take per 1,000 people? And ShoreTel came out at 1.8; Cisco’s full system 5.45 people per 1,000 four times more people to run a similar number of people. Cisco expresses the closest at 2.25 and you’ll notice about legacy, it takes seven plus people versus 1.8 to administer a legacy TDM PBX versus a ShoreTel PBX.
So this is about the total cost of ownership, it’s not just a capital cost of funds, with the ongoing maintenance and management cost it turns out that more than 50% of the cost of ownership is the ongoing cost. And as well you’ll notice from the salaries that ShoreTel person is 58 on average and this is the customer hires a $58,000 employee versus an $80,000 or $70,000 Cisco certified engineer to do the administration. When you net it all on the rate, the total cost per 1,000 is a 105 for ShoreTel. The closest is 60% more expensive and others are as much as four or five times more expensive to administer and that’s independent third party research.
Last couple of slides here quickly; we also look to outside validation. We like to be fact based and data driven. Numeric teams has been doing these surveys for eight years and for eight years running what they do is they don’t impose judgment; Irwin Lazar is here in the audience with us. He was one of the principle architects of this; they grab the survey customers and they say and they do it, PBXs and LAN WAN and storage and various categories.
So they make it their expertise to put the finger on the pulse of customer satisfaction. They say to customers, how satisfied are you with your vendor; then they ask who the vendor was and they correlate satisfaction by vendor. And for eight years in a row, ShoreTel was the number one highest customer satisfaction among all of the vendors. Here are the vendors that they surveyed in 2010; ShoreTel above four; the rest of the pack in the mid-three; might as well bringing up the rear at less than three and a half.
The next year 2011, ShoreTel went up in customer satisfaction, up to 4.3 a couple of people come above four and here is Cisco and Avaya down still below four. So over and over, and over again ShoreTel customers rate ShoreTel as higher satisfaction than the competitors.
One more piece, Gartner, did sum of that to be fair, this is North America and this is what they call SMBs with up to 500 seats but nonetheless they look at Cisco, Avaya, IBM, Interactive and you see the whole list. This is their chart, not ours. It’s just a reprint of their chart and you will notice that there's only one company that they give the high positive, the strong positive rating to it and they gave it to Avaya and Interactive Intelligence positive and the rest got promising.
So only one company was judged by Gartner and this was the combination of interviews with the partners, with customers, with competitors and their own expert evaluation and they placed their judgment on this as they give to their customers that ShoreTel will be the only one that deserves the strong positive rating. This year, a year later, again ShoreTel the only one in the strong positive some shifting between Avaya and Cisco and some different competitor set, but again of the entire competitive set only one company scored the strong positive.
So when you net it all out, it is this concept that ShoreTel has this truly different, really simple solution with a low total cost of ownership, high customer satisfaction, very high win rate with improving distribution and we can pan and we will continue to ramp-up revenue and with the addition of M5 we think its one plus one equals five.
So with that, I would like to welcome our newest member of the management team, Dan Hoffman who is the current CEO of M5 and soon to be President of the ShoreTel Cloud Division to talk to us a little bit about M5 and Cloud. Thank you.
Starting with the story, a customer story; about eight years ago, the travel broker business was dying, speedy with eating their lunch and the people that wanted to succeed the new they needed to compete on service good old fashion human service but they needed technology to do it.
Protravel was in this for, about 400 people, they were at a strong local presence on the Northeast and wanted to take advantage of turmoil to build a big national brand. So what does they have to do; they defined the best talent in the industry, wherever they worked, not necessarily near their offices, they have to give them the tools to enable them to meet a service standard that was new. People expected 24x7 on your cell phones, e-mails, text things, immediate responsiveness.
And in this new world Protravel executive team knew, they need a new way to manage to tie all of that information together so they could drive a consistent brand experience of that scale. They came to M5 because no one else had the whole solution. The market was fragmented. There was no provider that could do this for them and the advantage that they got was encouraging with adding new offices, their IT team like many companies today with lean huge cost advantage and they added hundreds of virtual agents around the country enabled by the best tools. They grew this thing with us to about 1,300 people. They picked up some great accounts, Tiger Woods travel, you know how hard that guy has been to keep up with. And today they do over $1 billion dollars in sales; they just passed that milestone, 100% on our phones.
So I am Dan, I have been at this thing for 12 years. For 12 years on a mission to be the best in the world at this one offering. And my job today is to get you acquainted with us. Many of you don’t know about M5; I am going to try and educate you a little bit about our business model, talk to you about what we have seen and where this industry is going and why this combination with ShoreTel made so much sense to us and why we are so excited about it.
And so first a little bit of history. We started with a bunch of entrepreneurs who got a couple of businesses together and really were in touch with this problem that Protravel had, the work place was different and our communications technology was driving us nuts. We met a number of companies like this, started the business on third-party software, the Broadsoft model. By 2006, we had grown a nice business up to about $10 million of revenue and we did a pivot, because we’ve run into the limits of that software. Our customers liked those models, but they wanted more and we were nervous not being in control of our destiny.
So we took VC; we embarked on this technology project; launched the soft switch a little bit later and started to see a real acceleration in the business. It enabled a couple of things we didn’t expect. For one, we ran into a company in Chicago called Gecko that had a customer base; it was doing well, but it also hit the limits of running a black-box and we were able to quickly put a large customer on our software and begin to scale that almost overnight; a nice advantage of having the best back office in this business.
And a year later, we found a nice technology; Callfinity had a world-class contact center. This was in April of last year and we were able to do that technology acquisition and integrate it into our platform very quickly to give us another major piece of this puzzle.
So let me take a step back, not everyone is familiar with hosted, what exactly is it and how does it work. So the essence is in an office, instead of the complexity of running any of these boxes at all, all of the intelligence, all of the server and call control, the Unified Communications is in the cloud. In secure data centers that we run, we have three of them. We plug in like a laptop into an office network, just the phone. And furthermore there is no more telcos, customers love this.
We handle all the local long-distance connections centrally, so that our customers don't have those bills and don't have to get that right. Another huge advantage of the model is we can connect the PBX securely to the Internet. So this is like M5 used case number one, home phones as virtual travel agents. Right you can take a phone and plug it in at home like you are in the next cubicle at work. And finally something that we have done that has kept us in a bit of a separate category is we have built a secure private network optimized for voice, so that we have perfect quality phone calls to offices.
It’s a part of our economics, we will get into a little bit later, but it has been a key differentiator. So we were lucky, we were a pioneer in the space, others have grown up around us and one of the early things that we figured out was to pay attention to three priorities. Like in real estate, location location, location, our business it was reliability and reliability, reliability. So much so that we launched this website a few years ago called trust.m5net.com. It’s public no password needed. It shows every system glitch and hiccup and our customers believe in it, our staff see it as a signal that there is nothing more important in our business and to date I have yet to see a single competitor follow.
We have set a standard for this business. So a few weeks ago in fact the FCC issued a new set of rulings for interconnected VoIP carriers that we were already way ahead off. We have our Net Promoter Score real time on the site as well and we will get into that later too.
And being good at this gave us a good client base, we just crossed 2000, we have some of the smartest businesses and entrepreneurs, they have taught us a lot. So Sub-50C category, we do this all day long, we have had some fortunate entrepreneurs that have grown with us, businesses like foursquare that came to us small, did pretty well and grew into what I consider our sweet spot to be today which is this 50 to 500 segment.
Ideally, number one fastest growing company in America on the Inc list last year. They cannot be weighed down liked fixed infrastructure, they are moving too quickly. And increasingly we have grown into a larger category 500 plus. So you will meet Martin Perry on the customer panel later, 1200 seats now, the Ranstadt Group, number two staffing company in the world increasing its business with M5 over the next few months to well over 3000 seats.
We are doing more and more and more of this having earned the right to service that business. So we pioneered it and we had a chance to see out ahead a little bit. We had a chance to listen to our customers a little bit, we had a chance to build a customer experience that was ahead of the pack and provides a long-term differentiation. Let me just give you quickly our view of the market.
Kevin actually alluded to this earlier, there is a segment of providers that serve the smallest businesses out there and this is a no-brainer solution for five seats, may be no physical office even before the point where they would have brought a phone system and that's in two camps. So some have tried to compete I think a little bit less successfully using third-party software like BroadSoft.
But the ones that have had some traction here, the [API] and the RingCentral figured out what we figured out that the scale to have economics to really do this they needed their own software. So we see them but at the very, very low end rarely competing. A number of other companies seeing what we saw this too, see open opportunity in the midmarket bought BroadSoft.
These are as Kevin said the Indies and the telcos but to jumpstart their business they have also used third-party software either from BroadSoft, we will see an offering soon from Cisco, but it's not a whole solution and they have realized what's actually been a pigment in our business which is isn't easy. You can just buy the software and run it. No your billing and customer care and portals and a way to sell that’s different in this market and so we have been able to compete very favorably with this category because we have this differentiated stack.
I'll show you some numbers. Again in contrast to the lower end of the market, the average dollars per client is like 10 times higher. [API] reporting close to 200 bucks a month, but on an average seat price the difference really stands out. We average up from 60 last year I think even with Mike’s math $63 a seat this year, about 17 bucks of that is that network component leaving around it $45.75 average per seat.
So I got this question, see we were talking earlier what about price pressure? Think back to my opening picture. The value of virtual communications of Unified Communications in this world today is going up, not down. If you can deliver the value, so people pay $40 to WebEx for a license, $60 to salesforce.com to track their customers, $100 for your mobile phone bill.
If you can deliver a differentiated experience, this model is like what Starbucks did, three bucks for a cup of coffee. It’s an experience that’s worth it for people and allows you to fund profitable growth on and on and on and distinguish from the pack. Another way to look at our business and one that I will hope you'll get familiar with is compare it SaaS. We consider ourselves part of this cloud world and so the key metric there is revenue resubscription. If you look at salesforce.com recently reported 88% plus which means if I had a dollar last year from that customer base I will have $0.88 this year churn.
In M5's business, if you give us a dollar, we will lose about 5% on a revenue basis, about 0.7% a month in (inaudible), a lot of the smaller customers do churn out, that 0.7 compares to but its 2% by the way per month, but we gain back seats, we gain back apps and we gain back location. So that dollar becomes a $1.6 a year later by our 2011 measure. Recurring revenue all day long that grows, it’s a great business model and that the essence of this just like in ShoreTel's business is a differentiated client experience. We measure it just like ShoreTel does with Net Promoter Score.
So that metrics pegs the telecom industry, the service providers we compete with at a negative 4, the negative the scale goes from negative 100 to 100. For those of you that are really good at math, some of your cover ShoreTel, so I hope you are in this category. We are infinitely better, it’s not just good for the customers, it's good for the business model. There is leverage in this recurring revenue thing. There is leverage in the shared services thing. So if an M5 sales person sells $1 million in a year like a ShoreTel salesperson sells $1 million in a year, that revenue grows and we have it for ever, we don't have to do it again.
It's phenomenal economics and we are about nine dollars to get $12 per year, a dollar per month of revenue which benchmarks very favorably compared to the cloud pack, the software as a service pack. We only have one version of software to support. So the R&D numbers are great, much more efficient and where we are at a business that 62000 seats, there is a natural scaling of gross margin as we drive up to about a 150,000 seats, but beyond that that network piece is actually going away a bit because customers like [Ron Stead] like Amnesty International are coming to us with MPLS networks in place that can handle the perfect quality phone calls and we are just selling seats on their network and now we have more and more and more apps that are high margin to sell to.
So it's a wonderful trend, it's a great business model and it has terrific economics. I think we will hold questions to the end, so let me go right into some demos, introduce [Brad Barbara] we have done this for years and talk a little bit, show you what this M5 experience is. What I have to say is that ShoreTel beat us to the words. We have been changing slogans and language for Brilliantly Simple and finally looking at this we can kind of say if only we could use that. It's perfect, let me give you my take on Brilliantly Simple. Simple is a game changer, it's like if you go back in time to VCRs and compare to DVRs, right. They could do pretty much the same thing. You could record a season with a VCR, you needed a stack of tapes, you needed a TV Guide, you needed to figure out how to program this thing.
And what happened, VCRs sat there all across America blinking 12:00, right. Avaya PBXs can do just about everything we can do. But we are like an app for your business, you hit one button, you have got a season of the Glee, right. So for M5 it's about higher value apps that are right there in your fingertips, that simple.
And the best way we think about brilliant is to use the smartphone example. All of you are carrying them in your pockets but work on your desk, the desk phone does the same job it has done for years, why. Again it's about the app, connected to the Internet where you have huge computing power in your fingertips, the model can actually change our lives, change our business life the way carrying smartphones has changed our consumption of music, managing our bank accounts and on and on and on.
So this I think is the first Cisco phone in the world with a ShoreTel logo on it. Its plugged in to builds network where are you in about 45 seconds and we have a dial tone, boom. If I am a travel broker working from home for Protravel and I have a question, all I do is hit the question mark button. Now every other provider in the world to use these phones, the question mark button produce zero statistics, it probably goes to the end user. We are like on star for business. Two presses of question mark button, you are in touch with our support group instantly. A case is logged in salesforce instantly. So its full advantage of end-to-end control of that software stack to create a unique user experience. Now then I’ve got people working from everywhere.
What happens next? I have been wanting to show you this thing for six months. We are launching this quarter M5 Communicator. I think we are launching at Enterprise Connect. This will show all those people working from distributed offices, who is on the phone, before you call, you can launch a chat session and the power of our model, our business phone numbers are SMSable. They are textable. Those are a key form of communication now, unified into stack. Eric, can you send Brent the text. Can you SMS him. Here we read this, bingo. Little fuzzy. You can see it. So all of these forms of communication again in the Cloud and unified in a way that helps us work for us, have access to each other and to the customers in a different way.
So how do you manage this. Again everybody is all over the place. I can even walk down on the office and see what they are up to. Our version of Unified Communication starts with this but the real power is in unifying the way people work together as a company for their customers.
So a very simple App I am going to show you, it’s a Personal Live Answer. In the Cloud we have huge data warehouses that can run analytics and can benchmark you against other companies. So we can know something very hard to calculate but very simple. So I mean in Brooklyn, there is a BMW dealer that became a client two months ago. They were about 25 point lower.
All right a real demo, 25 points lower on Personal Live Answer and what you see on the screen. So they called? Question mark button, gotten touch with support and said, I don’t believe this data. What is going on? At 7:30 in the morning it turns out the solution was simple, the guys who are showing up for work. So within a few days we had 25 more points, that is when car dealers make all their money, right. Your booking maintenance appointments and they were able to drive sales results by fixing that visibility to what’s happening in a business, that they could never have had before. And I can tell you across the customer base, 72% of main lines are answered live. It’s about 51% of direct dials. They can apply all the thousands of features with our experts to drive a real business change in service level and there is no contact center here.
Now of course we have a little cross contact centers. And the beauty of contact center in the Cloud is you don’t have to get the capacity right, the way you do, when you are buying a box.
So our great example, this one is our client does anybody know Bonobo, online retailer, super hot, they sell men’s pants. They were crushed by their own success on cyber Monday, after thanksgiving last year right. They just simply did not have enough people answering the sales lines, there were M5 customer then and they came in said, we need a solutions. We said, no problem. We will have our cross contact center, plug in to your business. You don’t need to do anything, you don’t need any expertise and we believe that service is not a department in the world today. So everyone in Bonobo can log in to this contact center, from their desk when there is a spike and very easily become part of queues and still pace, routing and all the pieces that we can now deploy.
So let me take this a step further and I will give you another business anology that helps me think about where this is all going. Another business tool that came a long way, the old cash register right. Think about it. For a hundred years did nothing but record what is happening in the business and then it went digital likes phones went to VoiP. Some good advantages, cashier at the front desk, little bit more productive, little bit more accurate. Terrific.
But some of the smartest companies in the world figured out that the cash register at the point of the sales system was real time, business data about what was happening and if you connect that to the supply chain, the fuzzy thing slippers are on the shelf, when the customer walks in the store to buy them and chunks come out of the business cost. Well, we have learned that phones are like cash registers for knowledge workers and so the business intelligence that we are able to glean by measuring real time communications and then the next step connecting seamlessly to cloud apps. CRM front of the pack have given our clients, story after story, of game changing business impact.
So this is actually the M5 phone embedded in salesforce.com. We did this with Netsuite. We do this with a number of vertical software applications. Its on and on and our clients don't have to do integration. Integration is a dirty word. It’s a connection in this cloud. StillPoint Private is my example for this one. So people are quick to dial but StillPoint Private is in wealth management. They are super hot financial services play and when one of their clients calls, while the phone is still ringing, I can not only see who is calling but I can see why they are calling. The business data is connected to the CRM, very powerful, by the way if you leave me a voicemail, transcribed and put into salesforce. SMS in and out of sales force. All these other modes unified in CRM because we have tied communications to the business apps.
So the ultimate grail for how you run a business differently in UC world is the data. Its not just about how many calls you can see their report, but are they the right calls, quality calls, their threshold is they are talking to clients in the database and are these conversations greater than three or four minutes. So it’s a very powerful example of how this huge UC dataset in the Cloud becomes so easy that you can really do brilliant things in the business.
Where I think its going? It was best described by Fred Smith. I think he said this FedEx. In 1978, it is not just about the package, it’s about the information about the package. 30 years later this is information about the communications. Information about the phone calls and that’s where we are going. That’s why we can go in the cloud.
So the question that I have gotten, I met many of you a few weeks ago in the east coast, as we did a road show and the question I got the most was why do this deal? We have a business that’s growing and a huge market acceptance and some of you know this about us -- again not too many folks here, it’s familiar but may be you saw it on in a magazine or an NPR.
We are also having a lot of fun doing this. We have a very strong culture. I believe it is the essence of delivering great service. A culture of employees who are engaged and learning. I call that the CEO’s wish for more wishes. So learning culture, and we underscore that by anyone that wants going up to a one of our conference room, taking a music lesson every week. And then we have a big battle of bands. This year we are going to have six bands. People that have never picked up an instrument before six months ago competing at May 3rd in New York City if you are on the East coast. It’s going to be a the huge venue and yes, ShoreTel will be in the race. You are all invited. So we had all this going for us, why did this feel now.
Management team and I and almost a year ago, looked at the data, looked what was going on in our business and came to the conclusion that things have changed. It was an inflexion point. We knew that we needed to make a move because when the market hits this main street phase the reader gets an outside share of this spoils. So we looked at alternatives we looked at private equity offers we looked at additional acquisitions to bulk up we looked at taking the company public? There too to early to do that and around that time ShoreTel came knocking and I have to say the board neither went through one process that many of you are going through which is to look at whether it is a good investment and we become a big shareholders in ShoreTel now and we went through the we do a 100 million in two years and ShoreTel goes 300 million and the leverage in their model and the leverage in our model it was a tough call but as we all said my god this thing is undervalued is it that the name is short is that why people are going wrong
Our decision was the other side of Peters build buy. It would have talked about it he talked about it and it would have taken us years to build 600 channel partners and it would taken to build 200 sales people that knew you had a cell phone system. It would have taken us years to get 200 developers that can build products with this kind of polish. International presence west coast presence so we came to the conclusion that ShoreTel was shortcut to a sure thing for, us to a market lead I think Mike is going to go through the integration map and one of the pieces that will give us real leverage because adding hands that control to the mix. I think that will be launched in the first quarter of next year and it is huge product, great economics for us, but also control the customer experience. But the details that I think tells the whole story and one of the things the team and I are most excited about, if you go back to my Protravel story, we are not exactly sure what these guys are going to be doing three years from now.
But the data is very convincing about what they are going to be doing it on; its clear; smartphones. And so here we have today the first phone with ShoreTel Mobility running against M5’s cloud software. Can you see that on the camera? Boom; answer it, I missed the call; you want to do it again. Answer it and you are in the app, we are tracking everything that's going on, you see how that's a missing piece of 30% of business calls. Its truly unifying the thing we've been chasing for years, we tried a bunch of different vendors, we tried to build ourselves, nobody had a product with a polish like this and it really completes our story.
So very, very powerful; there you go and it pops up. ShoreTel missed call. It will take a second to ring. I think the details tells the picture, it literally took us a few weeks again because we had code control and now we have code control of both sides to be able to do this integration almost overnight.
Demo Guard. You've got the idea. So it is alive. We are going to be doing the GA in the next quarter by July. So very soon it will be out to the market. It’s something our customers have been waiting for. I encourage you to ask Marty about how eager the (inaudible) to have this solution.
So we’ve got going for us is a market that has dinosaurs roaming the landscape. And this addressable market is beautiful. What we’ve got going for us is a shared vision, you will hear about the customer experience and how we compete on that together. What we’ve got going for us is all the pieces of the puzzle; no one in the industry has put all these pieces together and so for me, why do this deal, and why to do this deal now was first and foremast it was on mission for me and it was on mission for our company. Deliver technology and services and communications to the business as well. I am here to build a Southwest Airlines in an industry that does not have brand like that.
I couldn’t be more happy to join a whole new group of friends and colleagues and/or it’s investors in ShoreTel and I couldn’t be more excited that we are going up until the cloud together. So thank you everybody.
And I think the next step is questions. You have been waiting for it. So I’ll invite Peter and Kevin back up on the stage and alright, we will take your call.
So remember this is your opportunity to ask questions. We’ll have a longer session right after Mike Healy’s presentation. So you ask any questions, you like but I would encourage you to ask then about M5 because this is the new view and before you’ve sort of later on this afternoon you might have forgotten the questions. So up to you?
Lynn Um - Barclays Capital
Lynn Um from Barclays Capital, a question for you Dan. Could you just help us understand the jump process for you guys when you enter a customer have they already decided that they want a proprietary UC solution versus the third-party approach that Broadsoft has? And then I guess to the opposite side of the argument, why would a customers trust their hosted solution to your services, you guys versus a larger talk, I think you started on that, but if you could help us understand better?
Sure. To underscore the point that I think Peter made earlier that the customer often made up a mind least cloud versus TRIM before; in fact we did a match up of our sales force databases and sought 14,000 prospects, there were 12 in common, right. Now the customer typically doesn’t know that there was Broadsoft world, they know that this isn’t versus proprietary, they know the service provider.
So when they start to see the advantages and think about it and they are increasingly educated to think about talk versus service where Marc Benioff could have taken some book stuff, partitioned it and been in the market faster. If you look at the contact center, the market that’s hosted, it’s all their own software and their perfectly good feature with contact centers on the market.
You have to run your own software to be competitive in cloud. You have to run your own software to be able to control that whole experience and so it was a little bit of a controversial piece, we are talking about this morning, in 2006 we made a service provider send off to do it, but SaaS doesn’t know any other way and this is about the application and this is about the applications and about SaaS, so we really didn’t see an alternative in our customers to get it just like that now.
Sanjiv Wadhwani - Stifel Nicolaus
Sanjiv Wadhwani with Stifel; I see the value and the integration with salesforce.com and all that stuff; are there any other providers especially on the Telco side, Verizon and AT&T that offer a similar sort of experience even though they might be running Broadsoft?
Well, the feature is different than the experience. And so a lot of people have the features, but the experts on tap that know the business practices and can very quickly make it work for you, is something that we are focused deeply on. And technically, we've gotten very close to these other cloud providers we came to experience, so the relationship with salesforce is phenomenal. The team was there today designing the next generation of their CTI. We’ll have some very exciting announcements coming, but the key there is that the checkbox feature is a whole different story than the experience.
Steve O’Brien - JPMorgan
Steve O’Brien from JPMorgan, thanks Dan for touching on a little bit. But just going back to the ASP difference and idea of voice being a commodity; potentially it seems like some of the innovation here is coming from the partners of the voice providers? And can you help me understand why the voice provider itself is really driving innovation. And in that context how sustainable are these ASP differences $45 a month versus sort of $24 a month from maybe an (inaudible)?
Again, I go back to a very different experience that actually delivers the value and its more and more apps. That’s why the field made so much sense. We’ve held price for years, in fact we have built in more value for customers and they are looking at this and saying, you know for some businesses it is about cutting what has now become a relatively small spend; so the difference between $25, $45; I remember 10 years ago this was 10 times as much money.
But when our clients and I encourage you to have our client’s look, the comparing of the TCO and not just the point of sales is very similar TCO advantage to what ShoreTel has, to pay a couple of extra bucks for technology. It’s going work reliably, services going to be right there for you and a solution set that will plug right into your business apps and all that extra work. So the TCO and the total experience really justifies that continued price.
And you think about, some of the apps recording or something which is not just a basic voice, the mobility of another app which is actually that can be added on; transcription of voice mails is other app. So there is a lots of opportunities to sell additional apps to that same seat once you have customer and integrated with the voice as the key package conferencing, collaboration, why do people pay for WebEx, if you can deliver that as part of the solutions per se.
And that trusted relationship is the key to be able to do that; if your business like, there was this more than 20% of their customers that you will happen year-over-year versus one that has customer base, it’s growing with us. It’s a lot easier to deliver on that message.
Jon Arnold - J Arnold & Associates
Hi, it’s Jon Arnold, Independent Industry Analyst; At what point will you guys talk a bit about the channel and sales issues, especially with from ShoreTel when you are traditionally selling your products, now essentially you are selling your service and what does that translate into how this channel has to be trained and the types of channel partners you need to develop and invest in? And particularly for Dan, growth coming into your network now there is a whole new value proportion for your customers to consider; so in here minding a bit more about that specially being now in services in post mobile product?
I’ll start and the other two gentlemen can follow; on my experience of would you have a services organization next to a software-hardware organization, I would say premise is more like software-hardware solution sale. What Dan does is a services sale; on my experience to many technology company whether it’s voice or some other technology you keep those two sales organizations separate and I remember my history of Compaq adding people that are very good at selling a pro-line server and ask him to sell a service was night and day. He almost did a new sales force. So the parallel is there.
So we’re going to keep those two organizations separate, leverage leads and everything else and make it easier for them to pass; the deals to each other when it’s appropriate, so that they get the benefit of that.
The channel is little bit different; the channel, some of our channel partners today have launched services like managed service opportunity, other services opportunity. They do get their new stream, reviewer model and they are looking to add that. They also understand the difference of the sales process, but adding that enables them to handle both aspects of the market.
I can see already from the number of channel partners talking to M5 that they absolutely get it. We will obviously have a different certification process, so that somebody who is selling ShoreTel premise today will have to follow the right principles and training and sales collateral and other whole collateral and enable them to take on the M5 solution; just as we did with Mobility, so they are different certification process. So I see this is a win-win, not any form of dilution.
I would say many of our channel partners started mostly as essentially equipment sales, but many of them have come to us over the past months and quarters and even years saying we love ShoreTel solution, we are loyal to it, but we need a cloud answer. Some customers are asking for cloud, can you give us a cloud answer. If not, we are going to have to find one where it is kind of with somebody else and part of the drive to really launch a cloud solution was to satisfy the channel partners so they don't need to go to somebody else. But our channel partners very broadly are embracing the cloud and anxious to have a cloud solution as part of their portfolio and very happy to have one company provide both sides.
Ken Landoline - Current Analysis
Kevin and Dan, I see going forward in your roadmaps, the potential for some application conflict using contact centre as an example, what do you see as a 3 to 5 year view of how you're going to, are they going to run in parallel, the Callfinity and the ShoreTel traditional solution or where is that going?
Let me work that first. I mean we have got some work to do to sort out. I see them as an awful lot of complimentary, but most of what many things that we do will benefit them, many things they do will benefit us. It's true that there are some overlaps, there is some conferencing things, how is that going to sort out, the context and how that is going to sort out. I think it’s going to take some time to see, but effectively it helps lower our engineering cost as a percent of revenue because we have the opportunity to leverage each other’s success. So there is some great codes that they own in terms of Callfinity and some recording tricks there that we will leverage back into the premise-based solution and some great things we have in the premise-based solution that we can leverage over onto their side, so they don’t have to repay for it.
So I think it's part of that idea of getting leverage is making sure that the engineering efforts at first will continue in parallel and overtime they will converge more and more and we will see more and more synergy, but we are not in some big rush to eliminate either product line. I mean today we’ve kind of let them fly and overtime look for those synergies and cost savings.
Yeah I would add to that, one of the things that Peter and I saw eye to eye on immediately was the way to do this right is to pick a few things, really focus on getting those right and have that characterize the integration. So nailing mobility, nailing the ShoreTel phones on our network getting this partner channel enabled, the ones that are appropriate for it and then taking the ShoreTel brand that we can't wait to be and getting that lead flow across the web in the direct business working and that is our focus.
So as the teams get to know each other, you know the engineers are having all kinds of water cooler buzz about hybrid, nobody can do that in the market. I mean it is very exciting where this could go, but we are really very focused right now on executing, so that you know we don't get distracted.
Mary Lucas - Lucas Research
I have a question about you mentioned sales force and integration with other cloud providers, do you see yourself integrating in say some other more traditional providers and if so, could you give us some color on that?
You mean on-premise software like Sage or SalesLogix, we have yes. In fact our number two most popular integration is home grown because and the cloud that API cost for a quick to dial for example is a two-hour software project. So we do have a developer community, we have a website where we enable people to do that and it's very possible to do and another great piece of the deal is ShoreTel actually has this professional services team that does these integrations.
We are on the brink of building that we don't have to build it now, they are good at that. So we are able to bring that strength to our customers as the market wants that more and more.
(inaudible). So two things that I sort of want to follow up on, Dan had mentioned channel and one of the problems with channel right now when they are selling services is that they are not really incentivized because they get less money upfront and it's more of an ongoing thing, so how are you going to incentivize the ShoreTel people, you know from getting their you know big sales to doing the sort of monthly type of thing.
And then the other thing you mentioned hybrid and I'm a big advocate of hybrid and I think that's really where things are going. So do you see like some of the ShoreTel premise customers may be using the M5 for call centre and for certain applications or how do you see the hybrid model going forward?
My observation of our channel partners is they're pretty savvy, they like this idea of recurring revenue. Recurring revenue is a beautiful thing no matter who you are and like we like recurring revenue, our partners like that idea of recurring. Now if you are on a shoestring and you're worried about making payroll, that's a different kind of company, but companies that are solid, that have a business model today, it's a product sale model. They get all the revenue upfront, they got to go hunting in the next quarter. They like the idea of feathering in some recurring revenue and overtime building up that base and having that annuity stream. So our observation, as our partners are loving the idea of recurring revenue and generally patient as long as the total return over time is much greater which it is they generally like that idea. That's what they have been driving for.
Remember what I said that without any push from us, we have got a number of partners queuing at the door and the model that Dan has for his current partners is the same as they are being addressed to. So we don't see any reluctance at all for them to participate in this model.
Hybrid, well I think this is a real opportunity but as Dan said, we are step at a time, so it is not yet on our roadmap, but we see that and I will show you our vision that this is something big that we can develop over time, but it's not on the April roadmap right now, but we will start working on it.
Greg Burns - Sidoti and Co.
Dan, the question about the network component of your business, can you just give us a little more color on why you deliver the service that way, what’s the competitive advantage, why not just deliver it over the internet like API does, why have that component? What are the margins on that piece of business?
The margins are a bit large, about 25% of our revenue. But when you're chasing the customer experience, one thing you realize very quickly is perfect phone calls is a whole game. And dedicated to you online or an MPLS network, different flavors, for getting that right it is essential to having perfect phone calls. That's what we are known for, that’s our reputation on the line. So we have stayed out of businesses that couldn’t afford that where API plays and it's done great things for economics because in the long run if you keep your eye on low churn, that is much better than just you know acquiring a lot of customers. So that's been absolutely key.
I don't have the exact margin breakdown. Actually I don't know if Mike wants to talk about that, the difference between the margin on that or not, but we can follow up off-line. It's quite a bit lower than when you're just doing a seat and when you are adding apps on top of that seat. But when you look at the net present value of one of these customers and I realize that for some of the investors in the room, we are making a shift here from your lifetime to lifetime value from some of the one-time sales that are so key to us, the math is phenomenal.
I think it is interesting that people seem to want, the average margin comes down when you blend the high margin software and the lower margin transport, but when that transport is incremental to the business, it is incremental margin dollars that might bring the margin percent down slightly, but I will take all day. 20% margin or 30% margin on a transport when you simply get it working and stand back and it is ching ching ching, month after month. It's not a bad thing that the incremental margin dollars even though it's a lower margin percent.
We will do customers that are off net, but it's very, very key that they understand this difference.
New York Area Independent Consultants has been part of UC strategies. Just read an article on you guys on UC strategies was well received, went very well in your favor so congratulations. Two key questions. One is and I think you mentioned this a little while ago Dan and that is that you can adapt yourself into someone else’s MPLS network to deliver your services, that's a pretty unique model, like [XO] is an example is pushing out and you got to buy my MPLS along with my cloud offering is one example. So maybe you can talk a little bit about that. And the other thought that I had is in the article as well now is that what you're doing here in my opinion is really unprecedented in the industry, okay where you really not just partnering with a hosted provider you are actually, you purchased one. And therefore it's pretty compelling and in an extremely early adopter stage of I think a significant trend that’s going to happen over the next 3 to 5 years.
So how are you going to protect that kind of copyright?
Well we have got a nice head start and so I think this is a massive market, the total addressable market, it’s in the double-digit billions for sure. So being great at it, being first pioneering it is really the lead that we need.
No I think that business model is very good. It's a proven business model. I think their ability to innovate plus the support that we can give them in that innovation with the additional R&D and support resources we have will enable that solution to stay independent. And I think it's driven by what Dan said, it's driven by high customer satisfaction, very good voice quality and a Net Promoter Score and a capability which has also got their own IP.
Therefore they can quickly update and modify. I think mobility is a perfect example. So I think the moon, sun and the stars are lined up for them to enable that, it's all down to execution. But I'm very confident. I think we need to move onto the next stage which is Mobility. Pej will be up here in a minute.
So thank you and we will have plenty of time for more questions later, so (inaudible) missed your opportunity.
Unidentified Company Representative
Ladies and gentlemen, please welcome, VP of mobility Pej Roshan.
Thank you. So clearly Mobility seems to be infusing its way across ShoreTel as well as across M5. So I thought I would start off by just taking a look back at how mobility has made its way to where it is today, the abbreviated version. So if I look back to where I started to pay attention to smartphones, it was really around 2004-2005. I spent the better part of 12 years in the mobility industry and this is where you started to see the Palm Treo and those early Blackberrys.
If you remember the ones that were black and white, no color displays and it was really about telephony and getting very simply email interface on these devices and that was what was cool. I didn't have to have my laptop open. I could travel. I could be at home and I was able to respond to emails. And it was cool enough that a certain segment of the consumer population wanted in on that and that's when we saw the introduction and really acceleration of RIM, Blackberry internet service being able to have Gmail and personal email accounts supported on these devices.
Remember this was back before the iPhone or Android and certainly when those platforms were announced and revolutionized that touch experience on the devices, a new world of applications became available beyond email. Certainly web surfing was one of them, social apps started to become popular and you had a very rich social experience on these devices as well.
So much so that you start to see different generations of users adopting these as their primary communications device. And now starting to swing these devices back into the enterprise and this is where we start to hear about terms like consumerization of IT and BYOD. But what's interesting about this trend of swinging these devices back into the enterprise and the enterprise being a constituency of consumers is, what happened in that transition. We as consumers and I am looking at it not as corporate citizens but as consumers, started playing with these devices and we didn't have an IT department to really coach us on what to do. We had to learn how to use them ourselves, whether with a tablet or the touch interface on a smartphone or the applications that we were downloading. We had to learn to fend for ourselves and we actually became pretty good at it. So much so that as we start to bring these devices into the enterprise, we've got a good beat on what works well for us and what doesn’t.
So when I think about BYOD; BYOD itself isn’t the change agent. It’s a symptom of a change agent. The change agent is the fact I figured out what works well for me, that is all about me in fact when it comes to defining what makes me productive and what doesn’t. So when I started to bring my consumer based device or tablet into the enterprise, IT greeted me with a resolute no. And understandably IT’s job is to support a narrow set of applications and devices but to support them end-to-end to be extraordinarily thorough in what they are able to answer and support for their user base. And as these foreign devices started to come in, that didn’t conform to application support, didn’t conform to security policy, IT was well within it’s right to say no. Until folk of the right level of authority started buying these devices and bringing them into the office.
Soon, that no, just wouldn’t do any more. That no starts to turn into, yes. But that yes has caveats. The caveats that we will support our broader range of devices. Instead of Blackberry we might now be open to supporting iPhone. We might be open to supporting Android. We are going to expose our APIs to e-mail. We are going to make web applications available. We are going to enable other apps, to let clients to be download and install. If you use x, y and z) devices, we are willing to give you full support. If you deviate from these devices, you are on your own. That doesn’t just applied a smart phone, applies to laptops as well. Just as an example I am a Mac user and inside of ShoreTel, Macs were not fully supported when I joined with the acquisitions of Agito. And overtime, ShoreTel has seen the progressive trend of these devices; this operating system making-plan has come with the yes-but mentality.
And about 95% of what I do is supported extraordinarily well on the Mac and there is still a 5% thing that require Microsoft Internet Explorer and so Rick Parkinson has told me for those things you are on your own. And as a savvy end user I figured out how to make do. So ultimately I am able to adapt to self service model to be comfortable and confident and squeeze every ounce of productivity because only I know myself the best. So as I think that how that applies to mobility, those apps that I choose extending down to me work if and only if they meet a certain set of criteria.
Now think about an application that you bought recently from an app store whether an Android or an iPhone what have you. Think about how you heard about it. Maybe somebody told you it was really cool, maybe you saw a blog post, maybe you were just searching in the app store and ran across a nice little ride up of the little marketing where you may spent a dollar, two, four for it. Think about how you might have been disappointed when you actually used it and realized it didn’t live up to your expectations. I have got about 40 bucks worth of apps on my phone that certainly meets that criteria and that’s about a third of the apps that I have ever purchased. The same applies when we think about mobile apps for Unified Communications, short-term mobility in our case.
Where Dan was quick to highlight that the top three rules for Cloud were reliability, reliability, reliability. We have learned. We know now to be truth that the top three rules for mobility are usability, usability, usability. In layman’s terms it has to be super easy to use. If I can’t make it work the first time, the second time, the third time I give it a try. Then I was going to stop using it. Think about it for a second. If you have an app that gives you what Peter called the desk phone on the go and you want to make a phone call and it doesn't work, you have an alternative, you can just make a cell call. It might be more expensive as Kevin highlighted. Its out of control of the enterprise, as Dan again highlighted. But that alternative is there. So the pressure is on for that app to deliver the way its supposed to deliver. Its got to work on the device that I am using. I happen to be an iPhone user but I know there is an ocean of Android users out there and there's an ocean of Android devices. We need to make sure that those devices are supported or else it won't be used. It has to understand the network.
Kevin highlighted that one thing about short-term mobility is we can connect to Wi-Fi, we can connect to cellular, we can use cellular data when its available and that's wonderful. That has a significant and profound benefit for IT, from a cost savings standpoint, from a caller quality standpoint but as an end user you generally don't care, you want to dial a number, and have it go through. You want to send the message and have it go through.
If I think about security, security is a tough one when it comes to mobility. You have a corporate security policy that's designed to have a hard crunchy outside and a soft chewy middle. So that when you are inside the network you can access what you want to access with ease and that works well in the PC laptop paradigms. I can get on the network; I can get access to email on my apps. When I go home I have to launch this VPN client and that allows me to securely authenticate and have a very rich encrypted session back, so that I can access those corporate resources from anywhere. But with mobile devices the phone factor and the usability experience challenges that model. We have to come up with a new way to make sure that we can form the security policy without making the user go through gymnastics to access that corporate network; I will highlight that just a moment.
And finally when it comes to Unified Communications, it’s still a heterogeneous world. Especially if you look at it from the modalities of communication, voice infrastructure may be different than the [INF] presence infrastructure, which may be different from the video infrastructure Being able to streamline that experience for the end users within the sphere of UC, is going to be key.
So with that in mind I have a little demonstration that I would like to do for mobility here. I have an iPhone and once it projects we will do something simple. And normally when I do demonstrations, I had a history of kind of showing the latest and greatest capabilities that we are about to announce at launch. I think at this time what we are going to focusing on is the basic user experience. We are going to do something very simple. So Peter mentioned that desk phone on the go. I am going to do a short digit phone call on two solutions. One of them being ShoreTel mobility.
Now, all of us dial into conference, and it’s as a part of what we do. We do it whether we are in the office, whether we are on the go, I want to able to quickly dial these four digits and connect the call. So first I am going to select a competitive solution. So a layout similar to the native interface of the iPhone, I am going to pick my four digits in this case, 3900 is the extension of ShoreTel, for ShoreTel conferencing. I am going to dial; in this case the application doesn’t understand the network context. It doesn’t recognize that Wi-Fi is not available and it is now prompting me the end user to make a decision. What would like to do? As an end user not as a technologist, I’ve chosen to ignore the word that are on the screen and I am looking at two buttons, cancel and use a iPhone. Those are the same two buttons that you are going to be looking at and I am going to want to not cancel. So I am just going to select use iPhone. What is going to happen when you click on the four digits?
The experience here broke; it fell apart, because the user was expecting to be able to a dial a four-digit extension and mobile UC application like Desk phone on the go. The application lacked the network context like the built-in security and so the call routed immediately to the cell network, a four digit cell route on the US Cellular network. And so we get an error message. As an end user I am going to make the call on the standard iPhone dialer next. So lets contrast that experience. This is short-term mobility a very similar look. There is not a lot options for a dial pad on the device. I am going to do the same thing. Now (inaudible) to me the end user, we had already brought up a secure connection, the context is in place and as I dial something is going to happen, the call is going to get routed into the corporate network over cellular because Wi-Fi was unavailable. As an end user again I don’t care, I just want to dial hit the green button and go.
So as an end user ask yourself which experience would you opt for it? It is easy to build a soft phone on a PC and import that soft phone down to a mobile and that’s what most spenders do. So like ShoreTel heritage we had a blank sheet of paper to work with and we build our applications with a mobile device in mind, the mobile user in mind and hopefully that demonstration of a simple cell phone call helps solidify that.
So now I have some stats I have to share and I want to make sure I get them right, so I wrote them down. Because of this, because of our application and I think the way we've architected it now on the one side of ShoreTel we've seen a 30% revenue increase sequentially over the last quarter, over a 100 new Mobility customers, simply been here and of those in the sales process with 26 of the Fortune 100.
Its important to note, I believe for all 26 these are non ShoreTel PBX, so they opted to go away from their implemented PBX which might be Cisco, might be Avaya, it could be Heritage, Nortel, what have you and go with a third party solution for Mobility.
Two of our largest deployments are actually government deployments. One with the US government where we just crossed 2,500 active users and one in Europe where we just crossed 500 users. The way we sell Mobility is similar to how the Cloud services are sold. So we start with usually a modest deployment once they opt to roll out Mobility; some thing between 20 to 100 users. That is usually the pilot group where they iron out their processes with rolling it out and then move into follow-on orders and that follow-on order is an important metric for us.
So we are starting to see those follow-on orders roll in now that we've been in short for a bit of time here, most notably we've had a couple of notable wins synopsis the tech company in to the area started out with 20 users and just recently added licensing for their 500. Current TV started out with 50 users, you might know that from the TV channel, started out with 50 users is in the midst of upgrading to 400 additional users.
To get the region to the global enterprise, we have added a number of notable partners. So just last week we were in Barcelona with AT&T who is white labeling our solutions which is known as DMMV in their vernacular and launched that with them at Mobile World Congress, Bell Canada just after the acquisition had signed with Agito and ported over to ShoreTel and has selected short-term Mobility as its FMC solution of choice.
You may remember from last year dimension data was on stage and the panel’s talking, we are still rolling out to market with them with a number of successes under our belt together. And just a few weeks ago we announced together with HP that HP has selected short-term Mobility as its FMC solution first to go to market with as well. So things are really moving. We are really excited about the momentum that we have.
So now I would like to switch over into a little bit of roadmap. So I think you are somewhat circumspect about what we are doing; but I will try to give you a good taste of the things that are set to come. As a quick summary, what we’ve done today has really been around telephony. We wanted to get that voice experience right. And as you hopefully got a small flavor in the demonstration, we’ve tried to make it very easy on the end user, not only on the iPhone, but also on BlackBerry devices as well as Android. And those are the primary operating systems that are supporting today.
We are constantly adding phones and deprecating older devices and today we currently support 44 of the leading devices that are out there across these three operating systems. And I want to highlight, the bulk of these devices really fall into the Android space because that’s why we have the largest variety of devices to support. Many of our competitors only support one Android device, a single reference device. So if you deviate from that reference device, you’ll somewhat left your own devices; it may or may not work is what the vendors would typically indicate in the support model.
We spend a lot of time investing in SIP in our platform and because of this investment we are able to integrate with a broad range of infrastructure and I have used the word integrate. This is not an agnostic solution that doesn’t just work with anything, but it takes works for us to integrate and we are able to obviously support ShoreTel intervention and as you would expect, but also Cisco, Avaya, Nortel, Link, I am very happy to announce, M5 was a simple integration for us to support as well. So today, we’ve been focused on telephony devices and infrastructure breadth.
This year, our emphasis is around those UC applications. Now it’s never a destination but rather the journey when it comes to devices, so we continually are adding new devices. And whenever there is new iPad that I need to support, so we will be on top of that. There is certainly going to be more Android devices, there is going to be new BlackBerrys and in fact I think we just announced two weeks ago, we now have native support for BlackBerry OS 7 and OS 7.1 and might not be cool to brag about that, but there is still a large installed base of those devices out there and we continue to service that installed base.
On the applications side, instant messaging presence integration and emphasis around the tablet. So we will be introducing our gesture based tablet support as well as multi-vendor instant messaging and present support as well. We are really excited about where mobile is going; it’s fun to watch and if you are a gadget geek like me, its fun to be able to play with these different devices and see what they can do.
Now I remember a time when I got my first cell phone and I used to just turn it on when I needed to make a call. It was very much a convenience device and I vividly remember in 1998 when I left that device on all day for the first time, because I was starting to give out my mobile number to my inner circle of people that I wanted to be able to reach me anytime.
Now mobile devices are primary communications devices. We use it not only for voice but for email, SMS, instant messaging and so on. But I think there is going to come a time where that mobile device will become your only communications device. But its not going to happen automatically. There is still some things that need to occur to bridge the gap between a mobile device and some of the fixed line devices that we are comfortable using today. And as we look to tomorrow, next year, bridging that desk phone alternative is something that you are going to see us invest in as well.
Our deployments are growing in size. So today we can support up to 5,000 users, but as we again go to market with these large partners particularly as we go to market with M5 we need to be able to increase our scalability. But we've built a flexible architecture that's going to allow us to move up to 50,000 users. We plan to support that as well next year and adding additional modalities for communications; notably video. And as always it will be multi-vendor based video, integrating with all of leading vendors out there Polycom, Cisco, LifeSize, etcetera.
So hopefully this is a little bit of a teaser about what we are looking to do and we will keep your interest peak as we start making more detailed announcements throughout the year.
So that’s it from me. I want to thank you for giving me an opportunity to share with you how things are going and I am going to turn it over to Don Joos to educate us on the promoter. Thank you.
Okay, thank you all. You have been hearing a lot about our products and our services right now and I want to tie in the customer experience in this part of the conversation. As a company, we share a lot of stuff about averages the cycle times, and medians and so forth. But from a customer perspective they don’t feel an average. They don’t feel a median, but they will our inconsistencies or variation. They feel what’s happening to them at that moment in that particular process that they are dealing with.
And I think each of us has probably been caught somewhere in this process and that’s somewhere in our professional and personal life at different points in time. And as I looked at it, it kind of reminded me of the game we played as a kid called Mouse Trap. And I think as a business, we try to build better mouse traps to beat our competition and the customer experience building a bit of mouse trap, isn’t necessarily about complexity, about a targeted simple focus. And in that case more is not necessarily better.
And so the question, is can you create loyal, enthusiastic customers while having a simple targeted program to manage that customer experience. And the answer is yes. Companies will have an opportunity to gather lots of data about their customer experience and I think a lot of companies get caught up in the analytics of trying to find more and more data about their customers; but is it really actionable? Because when you think about it, a customer really just wants to you listen to their needs, execute against their requirements and support them when they need it.
And so kind of my view is that if you can’t get your customer strategy at the back of a napkin, it’s probably too complex and so we have broken it down to really three things; do we know who our customers are and using the net promoter score, we look at it into three categories, we have promoters those who are going to speak about your brand in the marketplace positively; the passives, the fence sitters and the detractors those who may speak negatively about your brand in the marketplace.
And so as we look at there we chose to ask the question, the net promoter score question is about how likely would you recommend ShoreTel to a friend or colleague? The reason we chose that question is because we didn’t want to ask how satisfied are you; when you ask, would you recommend, you are putting your personal brand into the mix; the much more stronger and coming from that customer that they are going to put their personal brand on the line.
And it’s a 10 point question, so if I answer nine and 10 they are in the promoter category seven and eight passive, zero to six you are detractors. And the math works that if you had 70% of your responders as promoters and 20% passive and 10% detractors, you take your promoters, minus your detractors 70 minus 10 you end up with a score of 60; and 60 is world class so I am just using that as an example.
So the first thing is understand where do they fall. Second step is create a close loop process. So we ask a lot of questions beyond just this one to gather some more information from our customers in there and creating a close loop process. So all we want to do is bring this information back into the business, because it could influence roadmap, it could influence our channel programs, it could influence offers, it could influence a lot of our processes.
Just gathering the information is just really nice, but unless you are going to do something with it, don’t ask the question. So how do we bring it back into our business? Then the third part is really how do we institutionalize it into our business operations, into the fabric of our business right now. And we do that by making it visible to our customers, make it visible to our employees, we embed it as a component into the employee bonus program, we tie it into our channel program including their contracts and then we have our reward programs to celebrate the successes in there.
We then take it and then see from a market view perspective, so there’s a lot of different names up here, a lot of impressive names up there and what we look at is we take it from SAP metrics as well as those public information from a bank consulting group had done a study on MPS. And we are not just looking at just our space, where we are going to look at is a lot of different B2B companies and B2C companies because we want to get a cross-industry view because there are some names up there that are really known in the marketplace for providing a great customer experience.
And so over the past year, looking at a year’s worth of data and thousands of data points right now from our customers, ShoreTel has come in at around 60, keeping in mind best in class is at that 50 level. So you can kind of see the comparison of who we are matched up with. But it doesn't just stop there, because in our survey we also asked the same question, not just how likely would you recommend ShoreTel, how likely would you recommend and we insert the specific partner’s name that is attributed with that customer and so we get a Net Promoter Score on that partner.
And our partners over the same time period you know plus or minus a point are pretty much at the same level as ShoreTel. So when you think about from a go-to-market perspective ShoreTel on a world-class score and you have our partners as an equal world class. That tandem that we are working in the marketplace together is a very compelling winning strategy from a channel model perspective and that has been a key component of our success and our growth.
So as you look it from the customer experience in the puzzle, I look at it as we have a targeted simple focus, it is all edge pieces and corner pieces. When you do a puzzle you always run into trouble with the middle pieces, is usually lots of them, you don't know how to get them in, you usually make a mistake, you have to take a step backwards at times.
We kept it simple. We really figured out listening to the voice of the customer what were the core attributes that a customer was looking for that had a direct correlation to them scoring high from a customer experience perspective? And it was back to the TCO that you have been hearing about before, the quality of our services and products, having the right features that fits our business solution, having the innovative products and the right support mechanism and having a vehicle that they are actually being heard, the customers are being heard and it's been brought back in.
So we take those attributes, tie it into the program I was just discussing and that's really what creates a very compelling customer experience, all the way through. So back to the original question that was on the title slides, why does it matter? Because you don't want to merely just satisfy our customers. We want them to be enthusiastic loyalist promoters of our brand in the marketplace. We want them to be an extension of us. Because when they are out speaking about us in the marketplace, we get more leads, we get more referrals, we get more add-ons, we get higher recurring revenue streams because they stay with us.
All of those are core components of again our growth strategy in that. But I think it's not just about hearing from me. Because you can hear about from a ShoreTel perspective, I think it's as equally powerful to hear about it from a customer perspective. And so what I would like to do is actually introduce Bill Schlough who is the CIO of the San Francisco Giants and Bill is going to be moderating our customer panel and you are going to hear directly from the voice of the customer as to why they are promoters of the ShoreTel brand. So let me turn it over to Bill.
Thank you, hey everybody. You guys can hear me okay, all in the back, cool. I am Bill Schlough, CIO of the Giants. Thank you guys for all coming up to the ballpark today. We are trying to get this weather out of the way now as opposed to opening there, our first game is coming up in 18 days and the opening day on April 13th, buy the tickets at sfgiants.com. And but I'm not here to talk about that today. I'm here to talk about a partner that is very near and dear to our hearts.
In fact since I work for a baseball team unlike some of the other shoots that I had to come up today I don't have to do that. So I am a little bit more relaxed, I do have to wear orange everyday, but that's okay because it’s the ShoreTel color and I also get to wear a baseball hat every once in a while because I work for a baseball team, so I had to put on this one today, that one.
Okay and this is really not going to be about me today and so many guys who have come in the past, I have spoken at one of these a couple of years ago and so my story is kind of tired but we have got three other customers that I'm going to try to bring them out of their shell today and I think they all have some pretty interesting stories that I think will be compelling to you guys as you think about ShoreTel today and look in towards the future.
So I'm not going to give thorough introductions, I am going to let them do that, but I'm going to call them up each individually right now. We will start with Matt Deringo whose is Vice President and Business Systems Manager for Brown and Caldwell. Matt, welcome give it up for baseball park you know alright. Next up is Marty Perry, CIO of Ranstadt Professionals. Hi Marty welcome. Last and certainly not least Scott Chambers, no relation, Chief Operating Officer Pacific Business Centers. Scott welcome. All right and we are just going to jump right in to this, keep it pretty crisp and hopefully entertaining.
And I just want to start out by having each of the gentlemen up here tell you a little bit about the companies they work for, about their relationship with ShoreTel, what else, their role and last but not least I really want to hear their favorite baseball memory, preferably Giant memory, but it might be a baseball memory. So let's go Matt.
Matt Deringo works for Brown and Caldwell. We are an all environmental engineering consulting firm across the US, we have now started to extend into Guam and Canada. We are actually a brand-new customer of ShoreTel, we haven't actually installed it. We have got a callow that we are trying to get a circuit into and down in Phoenix and that’s held us up a little bit, but nonetheless very excited to have made that decision.
And moving on, as for my favorite memory of the Giants, some of you might remember this. A couple of years ago I was here and I was actually in a booth and we were actually having the opportunity to meet Willie Mays and he was doing some autographs and like a sixth sense without any of the handlers even saying anything and he says I have to go and he gets up and leaves and he has been with us for quite some time. So it was a really enjoyable memory. Minutes later, he was going out onto the field to congratulate Barry Bonds for actually taking the record, the place was going nuts and he was out there at the base there and it was just amazing to have almost like he knew it was coming. So it was quite an experience. So you were here for that, I was here for that. Very cool, that was great.
All right Marty.
Martin Perry I am CIO of Ranstadt Professionals, we are US division of the second largest staffing firm in the world, I forget the conversion, a $30 billion worldwide organization presence in 41 countries. Here in the United States we have about 160 branches, we have a new acquisition we just did, been an M5 customer since 2007. We started with one division which is about 400 seats and from 2007 to 2010 we ramped up the rest of what was our US presence at the time about 1100 seats and we just made it, so by the end of the year we will be at 3000 seats.
I am a transplanted New Yorker to Boston, so my favorite baseball memories often times aren’t Giants, but my dad was a huge Brooklyn fan and I just know but he hated anybody that went to the left coast you know, but so he was a big Willie Mays fan and I think I have seen over the shoulder catches a million times and I think being a transplanted New Yorker Giants or Yankees fan, Melky Cabrera was a big favorite of mine, so good luck with Melky this year.
Thank you, I think he's batting. Mike he’s batting like 522 in Arizona I think. Okay Mike will pull up that number and he will report that in the next session to you guys. I am sure that’s critical to your analysis here. Last and not least Scott Chambers.
I'm the Chief Operating Officer of Pacific Business Centers and we are a regional here in California provider of on-demand office-based meeting rooms, virtual offices, telecommunications infrastructure, managed services for our clients. I am born and raised in the Bay Area, have been a lifelong Giants fan, current season ticket holder, not that I'm trying to give an advertisement here but I'm going to take kind of the low hanging fruit of my favorite moment. It was finally winning it all, so in 2010 to finally erased the Demons. We were never given credit for being as pained as the Cubs fans or others, but you know you have the Marlins who had already had two and we had done. So that was definitely by far in a way my favorite Giant moment.
Speaking of which I am sure you are all here for ShoreTel not the Giants but as you're walking out there is this big gleaming gold-looking thing with a lot of flags on it. You might want to take a picture of, I mean it's the only one we have ever had here in San Francisco and hopefully we are going to add to that collection over time. So just my quick story. So I am CIO of the Giants, we are a $250 million – $300 million company with probably total virtual plus real seats maybe in the 400 to 500 range with ShoreTel. We have been with ShoreTel for three seasons and we are batting 333 with ShoreTel right now.
Some might not think that’s such a great average, but that means one in World Series out of three seasons with ShoreTel, so we are pretty happy about that. Probably you might hear our owner Bill Neukom talk about our former managing partner Bill Neukom talk about the role that the team played or that the ownership played or that others might have played, but really ShoreTel, I mean everyone really knows behind the scenes ShoreTel had a lot to do with that success. But they really did and but I am not here to talk about that today. I want to bring these guys out. I guess I have got to have to tell that one magical memory, which I was researching before here. I mean I remember the memory but I want to get the stat straight. So for me it was 2000 the first year this ballpark, everything is looking very optimistic and bright as we went to the play off. We beat the Mets in game one.
Game two, bottom of the night we are down by three runs. Armando Benítez stays on the hill pitching for the other team fortunately. He pitched for us for a while but that didn't go so well. And it didn't go so well when he is pitching with the other team for them either because it was pitching to J.T. Snow who is not a power hitter for us but he was a very popular player with the fans and he hit a ball that went probably 304 feet which would be fly out of any ballpark except this one and it went right down the line and just hit the top of the wall right by the power pole, three run home and it tied the game in he bottom of the ninth and in the 10th the Mets scored another run. They beat us. They went back to New York and they beat us in the first round of play off.
So it was somewhat anti climactic but being here when J.T. Snow hit that home run even after the world series, the only other thing that is still the most magical moment I have ever experienced this ballpark to feel that. Although this one was a close second with Bonds homerun. Anyway I am not going to talk about baseball, let's talk about ShoreTel.
So you've got three very different types of customers up here. You've got maybe a fourth here. So a Premise-based customer, traditional ShoreTel business right here. You've got a brand new customer who is going to be premise based. You've got an M5 customer that's more of a Cloud based customer and you've got a managed services customer, somewhat of a hybrid and so I think you are going to hear three very interesting stories. So I am going to just ask each of these guys a few questions and then I will let you guys ask any questions you might have at the end. So we will start out with Mac, the new customer. So Mac we were talking before and I was bragging about how much I love simultaneous ring on my phone. and it is one of my favorite features with ShoreTel because wherever I am, my desk phone is ringing and my cell phone is ringing, so I can always be reached. A new feature in ShoreTel 11 that I love. And Matt was like, yeah, I don’t have that feature. And I didn’t get it first then he reminded me they haven’t deployed ShoreTel yet. So that’s why he doesn’t have that feature. But Matt can you tell me a little about the decision process you went through, I know you guys have Microsoft shop and how did you end up choosing to move forward ShoreTel
As Bill just said, full Microsoft shop and we have been on OCS 2007 for quite some time. Several years it has been a hot hit throughout the organization. We have got web cameras on every single desk in the organization and I don’t know if it mentioned earlier 1400, 1500 employees in the organization. So in our integration and how we look at integration in the organization is critical. What we do, being consulting firm, we have got technical staff all across U.S. We are constantly working and grabbing resources from all over in any office to service a client in any city. So that can be from here to Allendale or New Jersey or Atlanta.
So integration key, we look at Microsoft heavily because that was a sort of natural fit and they were coming out with Lync. I am very close with lot of our competitors. I knew another guy that was pretty heavily involved in trying to get Lync off the ground with them. We looked at few others. We’ve been a Mitel shop of traditional PBX for many, many years. So they were in the running. And then we also looked at Avaya and quickly Avaya went out. So Microsoft and Mitel went out very quickly as well. They just, they weren’t going to come forward with the features and functionality that we were looking for to be able to serve as SaaS.
Microsoft was starting to look good until we got them in a room we had sent ShoreTel a list of questions along with all the others around. Here is what we need, here are out requirements. We did the same thing with Microsoft and really what it primarily came down to, while our cost is always an issue there and certainly a strong one, the simplicity and the foot print of what Microsoft was going to require us to do, to be able to have this survivor ability of these sites was just unbelievable. I mean they are basically saying that we were going to have that multiple servers on site all across or multiple offices and that is isn’t going to fly with me very well because we are on a incredibly thin crew while they are very talented and very skilled it is just almost a non-starter to have something so complex.
So we are going to add staff on top of the cost just really kind of took it out the park for us that ShoreTel was clearly at the front runner in the simplicity of that to back and the scalability, one of the things that I failed to mention is while we have 45 offices we are constantly creating these small project offices that pop up and we have to service client and have to have it overnight, where we are going to get information. The simplicity of being able to throw at one of the ShoreTel devices that were showing up earlier in there to get those up and running and just connect back to the headquarters was just a great play for us.
So really that simplicity was the key factor and being able to be nimble, the flexibility and the nimbleness and the speed of which we can deploy. Right now and obviously in the old traditional PBX, changing offices we will scale down or scale up boxes or we are also changing the sites of those, the ability for guys to go in there and take those out, go take them to another location, I mean that’s really we need to have that flexibility and nimbleness.
Cool, well, I think you guys are going to hear the exact message consistently as we go across here and Marty is going to be another great example of that because talk about being flexible and nimble, he actually doesn't even have any hardware on site because they've gone, the Cloud route with M5. So Marty can you, now, what's interesting about Marty though is you guys have been doing business with M5 since.
‘07. I mean I don't think Cloud existed in ’07. I mean I don't think people would have ever heard of Cloud before. I know I hadn't. In fact Voice over IP was relatively new in ’07. So it seems to me like you might have taken a little bit of a risk and a step to go to the Cloud in ’07. So you tell us a little bit about that process and why you went with them.
I think in ’07 we called it SaaS rather than Cloud or ASP or our core business application was in ASP. So we already had two years of a hosted application, which was core to our business. Where we were at in ’07 is we had 45 offices around the country and for this one division. And so if you pick a three year lease that means 15 of them are moving every year, means every month we've got a PBX move. And same thing with small staff one deep everywhere and we said we've got these little PBXs in all these locations and they weren't great when they work and then when they die you know it’s a big catastrophe.
So we were really interested in VoIP and our Cisco partners came in and really wanted us to like manage and I said I don't want to be in the phone business, I don't want to manage Telcos, I don't have anybody here that knows anything about the stuff. Yeah it looks great, but I said I want something hosted. So we looked at what we would call ASP partners or SaaS partners at that time and narrowed it down to M5 and went with them.
Our drivers were first of all simplicity with the moves. We don’t have to mess around with Telco move anymore. We run one line in and we plug the phone in the computer end and we were on line.
Second was the risk avoidance. Getting someone else managing that. So we have got simple solution that someone else now manages and then it came down to feature and functions And in ’07 features and functions of the phone sounded great but really all we were concerned at that point was dial tone and voicemail. The guy following was me was exciting. We really think much about it and now its kind of flipped and we are at the point now of taking our 1100 phone deployment and going to 3000 phones and quite frankly our cost benefit analysis of staying with the company we acquired, which is a Cisco presence solution and M5 the cost benefit was fairly close but the integration with our core business system was key in the application, and the application integration was key. That was really what led us to the decision.
So you have got, M5 cloud based with your IP system, you just made an acquisition. You are expanding from 1000 seats to 3000 seats. So you are tripling in size. The company you acquired had a Cisco on Premise with your IP solution and you are going to transition that out and replace it with M5?.
How long will that takes?
We should be done by November.
It is tied more than anything else to getting the Telcos to move. So we have in the company we acquired, we have got 120 offices. Each one of those has a PBX into it because we basically drop local lines in as well as backhauling the internet to the data centers. So, we have very expensive physical deployment. So that will take us long really to get the phones migrated is anything. But the real drivers there were risk avoidance and simplicity and then the features and functions.
Before I give to Scott, I just wanted to talk me to that features and function for a second. One thing you said is it is little counterintuitive to me as you talked about the integration with your in-house Unified Communication applications. Historically when I think of on Premise versus cloud I think on-Premise we should integrate here, I can integrate it with my applications, it will be easier. Cloud a little scary, I am not sure if I will be able to do that integration. You just said you feel like it might be easier to integrate with M5 then with Cisco.
It is called the cloud so those end points have been defined already and our application service providers or SaaS or whatever you want to call them that does our core business application already has a full API set and they figure that all out. So it is not like it used to be ten years ago when you do an integration, starting out with a clean sheet of paper and say, oh jeez, how does this work? What is the language? Where is the database? Now those things are kind of all defined.
So our partner for our application is a company called [Bogon] based in Boston and they have done a number of fairly sophisticated integrations and in fact exact [RA Bogon] and tried with the [Bogon] customers. So that’s been a good relationship and they figured out those integration points. So it is not as hard.
Last in our list Scott. So you have heard from him what is called on- Premise customer like here or soon to be one, you got a cloud based customer and then you got Scott who is little different. He is in lot of ways he is little different but he is what you called a managed service and honestly I didn’t totally understand what that meant, but I think it means he is both a ShoreTel customer and a ShoreTel like retailer. So can you tell us a little bit about how that works in your role Scott?
Yeah, I think it’s helpful if I just kind of start from the beginning fairly quickly. We have been a ShoreTel customer for about five years ago, five years now and five years ago we did sort of an IT Day that said what telephony of communication platform do we want to use moving forward as we are getting ready to grow the business and we invited in Cisco and Mitel and Nortel and ShoreTel and an asterisks company that was specializing in our industry and we listened to all the dog and pony show and went over everything and our CEO and myself at the time looked each other and said, clearly like that ShoreTel, that's the one that wins. And we bought an asterisks.
But it was a company that was supposedly specializing in our industry and we are going to have the billing system and the CRM system and it just felt so turnkey and where that ended up being was a weak product of all of the above and it just did not, we realized right away that we had made a mistake. So as we started growing we purchased our first ShoreTel system and grew from there and what we do is providing on-demand space to flexible users and mobile users is we provide personalized telephony for instance as one of the primary managed services that we provide, but we were providing in every single brick-and-mortar location that we manage, extremely inefficient when you look at the amount of white time and the ability to centralize all that call volume into a call center and into a service center, just made so much sense.
And with the ShoreTel architecture, the single image connecting a vMPLS network as we continue to add locations and we are currently up to 15 now and 12 of those are on ShoreTel and the last three will be on within the next 12 months. The efficiency is from a human resource standpoint, where the instant payday. It was phenomenal. We were able to eliminate staff, recreate staff, of higher quality staff but they weren’t necessarily answering calls locally. That was centralized into a service center where we can train to or staff to it and into this moment it’s been very, very good decision for us.
Through that journey of growing our business over the last five years, we’ve seen our client base change significantly much the way in which I think corporate America has changed and that is with the mobile worker. The virtual office mobile worker used to be less than 10% of our revenue and now five years later it’s almost 30% of our revenue. And so with that comes the changing communication needs.
Now you have people that aren’t necessarily working at a desk phone. They are now in their car, they are in star bucks, they are in their home, they are in client’s office; whatever it is they are. Their work place is where they are in the moment. It’s not an office. And so this created a huge opportunity for us. So we partnered with the company called Cloud Virtual to provide these types of services nationwide.
And the reason I bring up that partnership is it changed the requirement that I was given as far as what we needed from telecommunications. The brick-and-mortar side of the business is still growing. They still want to place phone sets on desk. They want to be able to connect back to the service center. All that’s great. But now I have got people that we’re selling telecommunications services for New York City, in Miami, in Houston and now they want phone numbers out there and they want the ability to put phone sets on people’s small offices and on their desks.
How I am going to deploy? I can deploy the ShoreTel resources. They do have the technology to do that, but the management team and the board kept out here and so maybe we didn’t make a mistake at that point, but it’s five years later and that’s really a lifetime and a half in technology, maybe its time to go hosted, may be we really need fork with or get out or use it out.
So when I look at the acquisition of M5 which is a company that I engaged about a year ago to understand what they had and what their service offering was; they are one of the companies who we are considering partnering with some of our changing needs and you know I only recently found out that this was taking place.
But those of you who were asking earlier how does the customer see themselves integrating these various technologies and in a hybrid manner, we can tell you very realistically, we are anxious to learn that and do that with ShoreTel. And now I don’t have to go find a second provider; I don’t have to get them to agree to talk to each other; I don’t have to, because lets be honest, IT vendors when they get into the room it’s always the other guys fall, because this stuff works perfectly.
So now the management team of ShoreTel has taken on the burden of saying, okay we will bring you those solutions and we are going to work together. And I don’t expect it to happen overnight, but what I do expect is I think it will happen fairly quickly that there is going to be certain product offerings on the M5 side that we will use within business within the next six months and I’ll start deploying those; some of the questions will be how do we connect them back to the service center, how do we integrate you know the hosted platform along with the premise based platform and you know what kind of we are using SIP technology to get the signals and talk to each other; we are going to get a conversion box that says really anything coming from there is the same thing.
And I am very excited and I think that the ShoreTel engineers will understand that these are going to be needed and that’s nice that I don’t have to put the resources into figuring that out that I am not the only one with this unique set of circumstances out there that they realize the industry as a whole has changed and there is different requirements for different users, even if they are from the same enterprise.
And in our case, we are retailing it and I am selling this to individual users, small business users, but we are also selling to enterprise customers that come and use our services. So you know between the mobility, the hosted, the premise, the single architecture we are just absolutely thrilled to be a customer and really excited that are they are adapting to the changing landscape.
In addition, we had a request that because we share our system amongst all these various users, we want to be able to customize the music on hold message, so we can use that as an added value. Well, they just recently released it and said we can now customize by service group or something like that, I am not the programmer of the system, I am just probably who tries to figure it all out.
But we can now start selling this to a person who might have a three person law firm can have their own customized music on hold while they wait. It doesn't have to be a generic one. It doesn't have to be music. So again another great feature and in that part of working as a close partner with ShoreTel you listen to the customers and its very easy to preach that message because I have experienced it first hand.
Jumping off of something Scott said about the M5 acquisition what that means, as I rewind back to when we made our decision here which is before the ’09 season, previously we were in a Centrex model so we weren’t Voice Over IP, we had hosted phone service through AT&T and we worked with AT&T to transition over to ShoreTel Voice Over IP. We liked the hosted concept, but at that time in ’09 we didn't really feel confident that there was a hosted player out there that could service our needs at this ballpark with a number of phones we have here.
Now as you look toward the future though and its more and more technologies moving to the Cloud and we are getting comfortable with sending potentially our email to the Cloud and our critical data to Cloud the concept of having hosted Voice Over IP is very appealing to me. So I am pretty excited personally that ShoreTel made that acquisition, because we love working with ShoreTel. We love their service and we love the fact that we can kind of partner together to develop this platform.
Now that they have got, added M5 to the fold and its Cloud based capability, we can see ourselves migrating in that direction at some point. Definitely for us, our model here is this facility has lots of phones. We've got a few in Scottsdale at our spring training facility, a few at our practice facility in Scottsdale and we've got a warehouse. We have like four or five sites. Those other sites currently have premise based switches. They are the virtual switches but they are switches.
But the concept overtime of migrating those, starting with those and going Cloud with those, seems like an old brand. So it’s great for me as a ShoreTel customer. I know I have a migration path to the Cloud. And I don’t know if that’s the case with lot of ShoreTel competitors at their positions. So I think ShoreTel is a step ahead in that space.
One other topic I want to cover with everybody up here is Unified Communications, because that’s kind of just like there is a lot of budge where you’ve got Cloud, you’ve got Unified Communications and it means something in CRM, it means something different to everybody. So when we talk about Unified Communications, is that really critical to your business and what does it mean to each of you guys when we say Unified Communications?
Want to start with me?
Yeah, Unified Communications is absolutely essential. I had mentioned earlier about the OCS component of that. I mean our ability to communicate in multiple different ways; I mean I just saw somebody in the back, using in some messaging, going back and forth. That presence.
Just while you were talking?
Well I was back there. There is nobody on their device, they all are just totally focused on us.
Focused on us. Right. But nonetheless that seamless transition between looking at a presence knowing if somebody is on the phone, knowing being able to instant message them, create a video call with them or a mobile call. I mean that ability to kind of transition between that is really important for us to be able to work as a team, because we often times have large project teams.
And what really kind of set, I’ll tell you one of the things that I didn’t say earlier that really set it all for me where ShoreTel was that conferencing device that they showed back here. That ability to be able to do desktop control of someone else’s machine and actually do that with a single click, that was like brilliant I mean that was in a sense for us we constantly have to collaborate and be able to work on a single AutoCAD drawing about a facility like this.
And in order to have those kinds of reviews remotely and be able to that with a single click to be able to have that experience is really powerful. I will tell you that because we’ve decided to go with that we are actually pulling out all of our very expensive WebEx licensing. Those are coming out and we are also getting rid of all of our Verizon conferencing phone numbers, every single person in the organization has got a conference number, those are all coming out and we are going on to those devices that are sitting behind me. It’s really a nice, nice piece.
I’ll add on to what Matt said, for us Unified Communications I think the integration into our business app Dan demoed the salesforce and we saw some of that just scratching the surface of what’s coming with our core business apps and move them into migration in a business intelligence perspective. So the fact that everything you do on the phone manifest itself into this tool, it’s huge for us.
The other piece you know as everyone has simultaneous ring you mentioned that finally follow me, but I think that you know when we went with M5 one of the benefits we had with 45 offices around the country and one of them always got a snow storm or hurricane or flood or fire or something, so our business continuity plan for the small offices was go-home because you can pick-up your phone go home plug it in, everybody has got more bandwidth at the home than we’ve got in the offices quite frankly. And they can get to the core apps and they can do their jobs at home, just as easily as in the office.
Well, that’s fine, what we find they tend to do is they don’t pick up their phone and take it home, what they do is they forward it to their cell phone and work that way. But when they can have a mobile device, an iPhone that logs in just like a soft one would and is in fact their desk phone, I see 40% of our people that's how they will work everyday. They will just walk around with their iPhone all day and that even further enhances their continuity, so that’s the kind of UC functionality that means something to us.
So for us it's a little bit different because again we are not one enterprise. We are buying it and then retailing it, so the average user of our clients is two or three or four users. We have some larger users, but for the most part it's small businesses or branch offices of larger companies. So for us you know the value in the Unified Communications is the apps and the mobility. You know playing it simple, being able to sell sales force integration with you know you are one or two person firm and you can have those kind of applications integrate with your phone system or your communication system that you're leasing from us on a month-to-month or a short-term basis is invaluable because it gives us so much more stickiness for our clients and creates so much more value in the service, the managed services that we are trying to offer which is give them as much as we possibly can. So a little like the hosted model in the sense that you want to put that experience at their desktop or in their handset and make it as rich as possible so they stay with you as long as possible and that's been our experience. So with the ShoreTel, we are just finishing up preparation for our most recent software upgrade and then we are going to roll mobility out to our entire 2000 plus clients and make a concerted effort to get that into their hands and work with ShoreTel and our great value-added reseller that they work with.
I want to save a little time for questions, so we got you know 5 minutes or so, if anybody has got questions. Again you’ve got three very different types of clients up here and one soon to be installed client and so any questions from the audience?
So I guess the question for Martin and Scott, if you want to chime in too, I mean did you have a look at other hosted offerings. I mean some of them out there on a per head basis maybe substantially cheaper than M5 networks.
We looked so twice in 2007, we looked at what was the universe at that time. Quite frankly I don't recall that there was a lot of difference in pricing, there were differences in the models. I remember one of the people who was in the hosted business had a model that involved a fairly substantial implementation fee and then a per-user fee that might have been a little less. And then we looked again to see what the world looks like in 2010 and it seems like, just like the chart showed you had a lot of the guys that sell in that eight by eight category, there were a slew of them, there were a few that were a little bit higher up the stack, that looked quite good similar to M5 but none of them that were compelling.
I know that Dan’s chart made a point about the fact that their own software differentiated themselves from the people that were buying a softswitch and that was pretty obvious when we looked at others that you know the features and functions were pretty regimented based upon the switch that they had and we hadn't thought of that much at the time, but we kind of liked that the fact that M5 could customize around their softswitch offerings.
I just had a question for Scott and Bill, can you give us any datapoints around TCO results which were out. Any bones you can throw us as far ask what your savings have been, anything that might have been revealed that you weren’t expecting, some payback datapoints that you might have found?
Specific numbers are a little bit hard to gauge because we have grown so fast, we have gone from you know one installation up to 12 and we have 700 physical seats and over 1500 virtual users that are on it, but I can tell you that it's managed by one person. [Pack Effusion] is our trusted value-added reseller here in the Bay Area and they are phenomenal. But the amount of engineering time that we need to engage them outside of our defined service contract is probably less than 50 hours a year.
So and the one individual, Charlotte, she is in the back of the room over there, basically self trained over the three years of implementation and that when we open a new office, we have preset agreements that we do 90% of the programming of the HQ system in preparation for it and so we are significantly, I mean we can go in and install for probably 75% savings on a typical installation. So I'm using percentages instead of hard dollars, but I think it's kind of hard to put hard dollars out there.
The biggest early savings was in human resources because we were able to centralize the service center. I think that was the exciting part, but now on an ongoing basis, I am very pleased with the budgets that I have to put forth to get approved, to continue to maintain the ShoreTel system.
Rob on our end, we moved from a hosted model Centrex model to Voice over IP for the first time. So unlike Scott we did not save on human resources or in theory we didn’t because it was hosted. So we didn't need any technical on-site resources. However, we did need resources to be running down stuff with our partner regularly. So we were a little worried, we were moving into an in-house solution that we might need to send somebody to do weeks of training and hire very expensive technical folks.
The good news is with the Brilliantly Simple story, it's true. ShoreTel solution which if any of you guys want to take the tour after this all is over, you are going to get to do down to see our very glamorous [MPO] room behind the scenes and where you can see what it takes to run this facility and it's not much, it's very simple. So we were worried we might need to add resources, but we really didn't. We took the existing resource we had before who was not a technical resource and she manages the ShoreTel system and she’s still not technical. She took a little training, but it's pretty basic stuff. So did not have to add any headcount and we saved and in the quarter previously on this, it's been a few years. But we saved I will make you do a little homework, but we saved in the vicinity of the major league minimum salary each year.
Sorry for that. Well you can look that up. I mean that is common knowledge, you just look it up, we just did a new collective Burn agreement. So you can look it up, but we saved in the vicinity of the major league minimum each year and we definitely have paid of the system now three years into it. But that was one piece of it, we look at cost savings, we also look at revenue generation and it's a little tougher to measure, but because of some of these features and function and particularly on the Unified Communication side, for us it's not as much about connecting our staff with each other, it's about better connecting our staff with our key customers.
Folks like Scott, season ticker holders here, maybe some of you in the audience being able to be more knowledgeable about those folks when they call in, screen pops, reporting of our calls with season ticket holders and others. It's hard to measure and quantify those dollars, if you pull it up that's a lot. Major league minimum is not bad, we have been doing pretty well.
So anyway the screen pops and the other capabilities hard to measure, but we feel like we are able to get a little closer to those key customers and drive additional revenues through that too. So time for one more question.
Hi this is (inaudible). I have a question, we saw a fairly compelling demo from Pej around what’s going on with mobility, have any of you considered not buying phones anymore and just having everybody use a mobile device?
We have 1500 virtual customers, so they're already doing it. I just need to connect with them better than I currently am and that's where mobility and our efforts around to sell that onto their current phone and show them why they can get an enhanced level of experience will be. So I have a customer base that’s just waiting for me deliver it to them.
Our legacy business was Centrex open clients. So we had decided to move away from Centrex because of its weakness in rich media. So we did a survey of people, we said if you could have a laptop or your thin client in an iPad, which would you prefer. 85% didn't think of it on an iPad and that’s not what you're going to do, but it's still kind of what the field acceptance was.
I can say that we absolutely are planning to not buy phones for our field staff. So we have a tremendous fleet of folks that have to do fieldwork to collect information, to oversee construction. We are going to arm them with a iPhone and that application that you were showing off. And that's all it will have.
This is slightly off topic, but this facility is one of the biggest Wi-Fi hotspots in the world in terms of the traffic we drive, a typical game here. We have 17% of our fan base, so about 6000 to 7000 fans get on our Wi-Fi network. Meanwhile we also have a robust 3G DAC system, now 4G LTE which will debut soon. Even with all those systems and the millions of dollars we invest in Wi-Fi and DAC here, on a huge game with 42,000 people and all of them taking pictures and streaming video, these networks are challenged and this is a challenge that every sports facility in the world faces, but more so here than anywhere to our (inaudible) Stanford Stadium which is even tougher and because of that, it is tough for us to move to a different, to a mobile platform for us to do our business.
It's nice to have these ShoreTel hardware headphone just in case. So long term hopefully if we can ever get ahead of that curve in the 3G 4G whatever comes next, 5G space and the Wi-Fi space we would love to go there, but right now we like to have the confidence of a wired phone still at this facility when it is packed. So I think that's all the time we have. I want to take a second to thank our panel.
And I'm going to invite the next guest up on this stage, so thanks to you guys. So next up is a friend of mine, someone who is near and dear to all your hearts, who I know you guys have been sitting there waiting to hear from. Soon after he presents to you, he will be hopping on a plane to Arizona to watch his favorite baseball team, take on the [As] this weekend and play a couple of other games.
And in preparation for that trip I wanted to give him a little gift. He doesn't know this, but you know he's a finance type, so these guys are a little bit stiff in general. But he is less stiff than most but you will notice that he's not wearing a tie unlike a couple of other guys who came up here, all dressed nice and ties. So that's a sign that he's not stiff as your typical CFO. But I did want to give him something to prepare for his trip and since he's the finance guy, I figure you know maybe he does wear a tie from time to time.
And so Mike I know you don't wear a tie, but if you did wear a tie, you would probably want to wear the same one that Kevin Gavin is wearing today. So everybody, Mike Healy.
So thank you Bill. So I have got an important announcement to make. I know you are all on pins and needles, [Noel Kookaburra] is hitting 481 in spring training for the San Francisco Giants, so just wanted to get that out there. So thank you for coming today. This is a dream of mine, right. I get to tell you about the company I love and I get to do it at AT&T part home of my hometown world champion Giants. So it’s nothing better, like I work here everyday, I would try to do that. So I am going to spend a little bit of time giving you an update on the ShoreTel Premise based business and then go into some details on our new M5 Cloud business and then finally put it all together in terms of what our go-forward model looks like, give you an update on the acquisition, that kind of thing. So you can get some information on how all this thing comes together.
So first on the Premise-based business, right. The ShoreTel Premise-based business is very strong, in great position. We had a great quarter, December quarter we had world record revenue of $58 million. We had 1300 customers join us that quarter, the most we've ever had. Our percentage of business from new customers is 52%. Our discount is relatively flat, margins holding relatively steady. So in all phases we are in great shape in terms of the Premise core business.
So getting into some of the details here I am showing you the orange line is our ShoreTel revenue growth annualized, year-over-year, against the market, which is the black line and you can see in every year from the beginning of time, it kind of exceeded market growth by at least 20 points. Just the year 2012 I cannot expect the market to grow probably, Peter said earlier somewhere between 7% and 10% and this is the U.S. IP market. So we continue to outpace the market. So obviously that means you are gaining market share.
So here is the market share trends over the last four years. You can see ShoreTel in the pure IP space excludes TDM and Hybrid. But over the last four years ShoreTel has shown significant gains in market share. Cisco has been kind of have been up and down and then you see Avaya, Nortel as a combined, there is certainly lots of fair share of market share due to the combination and Mitel has been steadily heading down. I constantly get asked about Microsoft Lync and according to the synergy in the U.S. they have been averaging about 1.5%, 1.6% market share last three or four quarters. They really haven’t gone up significantly. So we are certainly watching it closely but we don’t see them progressing up in our space especially in the U.S.
From a revenue perspective, here are a couple of key things here. So this is our quarterly revenue through December, our Q2, 2012 and the orange line is our quota-carrying headcount. So there is strong co-relation between our quota-carrying headcount growth and how we do on revenue. In fiscal year 2011 we had, our quota-carrying headcount went up by about 44% and our revenue grew 35%. This year we slowed down hiring a little bit. We are trying to focus on profitability. So we are going to show little bit less growth.
The other point I want to make is we will start seeing more seasonality, trying to be reiterate that but I want to make sure I am clear. So in our Q1 and Q3 periods our March and September quarters, we typically have a slower bookings quarter than Q2 and Q4. Q2 December conceivably stronger because there is calendar year companies ending. And then fiscal year end for us is June Q4 and usually the partners are really going well and sales guys are trying to hit their quarter for the year and those kind of things. So those quarter are usually stronger in terms of quarter achievement and the other two are not and the reason we haven’t seen seasonality in the previous quarters is because the backlog carryover is usually pretty small and usually pretty constant and at $30million- $40 million that backlog carryover may mute some of the seasonality in Q1 and Q3. But as we get into the $50 million and $60 million ranges now you are going to see less of that backlog having the impact on the quarterly number. And that is biggest reason why we guided for the Q3 quarter down from Q2. So I do expect that trend to continue, not necessarily down every quarter, but certainly less growth. So I wanted to make sure you model it that way going forward.
Productivity, we talk about this is trended productivity. So its total revenue divided by quarter carrying rep. You can see there it is kind of been averaging up a little bit last quarter. While it is okay, it is not great. We are not overly excited about it, but we are not thrown in the towel or anything like that. And I will explain to what is going on in productivity in a minute. But even at 275 that is about $1.1 million of revenue that our rep is producing annually and our cost supported rep who travel and all-in labor and benefit is about $20000 to $30000 less.
The margin, they are contributing on an average close to 45% or 48% contribution margin, each rep brings in. So we are planning to continue to hire mostly in the US because those reps are more productive than overseas. We are planning on continuing to hire in the US at a good pace as we move into fiscal year ’13 and that will be one of the biggest drivers to get to our revenue numbers that I will talk about in a minute.
So the one thing that has affected productivity is we've invested in mobility. We heard Pej talk about it. We've created a separate sales force mobility to go hunt these big deals and we have about 12 people in mobility, that's all they do and the revenue rep in mobility is growing fast but still relatively small. And you can see back in our mobility and our channel development has so we created a separate channel development group to just focus on partner recruitment and launch. And those guys as Peter said we've recruited a lot of partners but again the revenue ramp there has been relatively slow and so when you back out those two groups and you can see the productivity has been pretty consistent. You see some seasonality in these metrics but Q2 was I mean almost the same as Q2 2010. So that's more like the productivity we want to see but again we did this exceptionally on the mobility side because is the strategic initiative of the company to continue to invest there to get that business ramped up and it is a longer sales cycle on the mobility side.
So that sales productivity. So what are we doing about it, what are we changing in terms of getting that productivity up. Obviously we would like it higher. Peter’s talked about, about some of these things that we are changing comp plans to focus more on revenue and less on partner recruitment for those channel guys. We are ramping the new VAD, Ingram, Tech Data, putting more resources behind that. And we also are about to launch a sale center inside of AT&T ,so you should think about as an inside sales group within AT&T that will get orders and help facilitate orders through AT&T and get to market faster. So that I think is going to be launching next quarter and that should help our volume in AT&T and bring up the overall productivity. So those are just some of the things we are doing in terms of helping the productivity.
Changing to international from an update, it has been averaging about 12% of total revenues, is been pretty consistent. Last year we invested pretty heavily in headcount growth and revenue grew 52%. Our largest countries are U.K., Canada, and Australia. We have seen very good growth in Canada, Mexico and Far East Asia recently and M5, Dan didn’t really talk about too much but they have essentially zero presence internationally today. One of our initiatives moving forward, not right away, as we start putting that Cloud service over in international. So it’s a great potential for growth. It will take a lot to build up the infrastructure, as you can imagine overseas, but that is one of the thing we will be doing. So I can’t predict that internationally our growth will be faster than company both fiscal year ‘12 and fiscal year ’13, probably 25% or so in terms of what we can do internationally. Most of it coming from those three large countries I mentioned.
Gross margins, last quarter we had about 66% overall gross margin. Part margins were down a little bit. Support and services gross margins were up at 68%. Don is doing a great job managing that group and happy satisfied customers, typically they have to spend a little less in support. Those numbers move around mostly due to direct labor. What drives our margin more than anything is really discounting in our heavier promos we do. What percentage of business comes from new customers because we typically discount a little heavier from new customer standpoint than an existing standpoint and then to a lesser extent product and geography.
The other big trend in our business has been our shift to two tier VADs, value added distributors in the US, where we do give up a few more points to make that model go. So that would be about 80 basis points and that has ramped up to about 34% of our billings in the December quarter. I expected that growth will slow down a little bit and I don’t expect our VAD business on the PBX Premise side to get above 50%.
From a balance sheet and cash flow stand point, as of end December we had a 116 million in cash, earning very little yield. So we put that work and our acquisition of M5 which I will give you an update on in a minute the deferred revenue that is a revenue from our support maintenance agreements that we bill and collect for and we amortize the revenue over time 1 3 or 5 years depending on the contract. That also includes the inventory we ship to our VAD that hasn’t sold through so we recognize revenue to our add based on sales through data not sell in and so when they tell us they sold it a reseller then we recognize revenue. So there is some revenue sitting in our VADS at any one quarter that we differ as well and so that’s the good measurement of future income that deferred revenue number has actually been growing faster than the overall business. Day sales outstanding of 36 days has been phenomenal and that is in industry you can look it up we have a great group to do with all the three people and from a cash flow perspective, $6 million over the last six months. Here is where you’re see the impact of moving business to that as we turn that capital quickly because we sell and they pay us quickly and then they’re selling later. So that’s been a huge benefit for us from a cash flow perspective moving our business through to two-tier distribution.
Moving on to the M5 Cloud business, so a couple things here. So we are still working on closing M5. We’re on-track to close by the end of the quarter. So as of today, it’s still not part of ShoreTel. So whenever it is, that’s when we will start counting revenue. You know, maybe one or two weeks, depending on when we close in March and then you’ll obviously have the whole June quarter. So all the data I am going to show you assumes we have kind of M5 for one quarter in our fiscal year ’12, the June quarter and then obviously four quarters in fiscal year ’13. So the numbers get a little screwy.
And then, yeah, we expect that after closure, as Peter said, we will keep it independent or going to try to merge as much of the G&A functions as possible. But just to go over some metrics and some questions on the M5. So as Dan, and I, and Peter and Tonya have talked to a number of you, a number of questions, rumors came out. So I want to put some of those to rest.
So first and foremost, the numbers I am going to show are calendar year ’11. They’re unaudited. Audit is still underway. It would be done probably by the end of April. So I have preliminary numbers for you. Obviously, those chopped in 8K/A, kind of in late May, or June, when we file the 8K/A, that’s required.
M5, you know, bills monthly to their customers directly. There is no support element as part of their bill. It’s all service they provide. And therefore there is no deferred revenue. So there is no deferred revenue that’s going to go away through acquisitions. [Sanjiv] put a good note out, a little while ago and helped clarify that. So I thank you for that. So that’s one thing in terms of purchase accounting as you guys know deferred revenue typically goes away.
I think Dan has talked about there is circuit charges baked into the MRR revenue of about 25%. So you take that out and the MRRs maybe $40 to $45 a person. We see the business as complementary to our PBX premise based business and don’t expect a lot of cannibalization. You heard this say there is very little overlap in our customer database that we’re chasing today. But just to be safe, we did billed cannibalization into our synergy, accretion dilution model, not a lot, but some just to be safe in case there is some cannibalization.
Gross margins for calendar year ’11 looked preliminary, looked like they will be 47% and that includes all the normal stuff, direct labor provisioning, all the Telco cost, and then allocations and rent and depreciation those kind of things.
In terms of growth for M5, so we made two acquisitions as Dan told you, Callfinity in calendar year ’11, and Geckotech in calendar year ’10. So if you back out just the Callfinity revenue in calendar year ’11, growth would still be 50% year-over-year. Callfinity revenue will probably be less than $1 million for the year in calendar year ’11. If you want to back out both acquisitions out of the total revenue numbers and call it an organic number, then the growth for calendar year ’11 will be closer to 35%. Not much seasonality in the Cloud business because the recurring revenue model usually moves any kind of seasonality.
So here is the P&L, preliminary P&L for calendar year ’11 and ’10. So let me just walk you through some of the terms, some of you may not be familiar with them. MRR, means Monthly Recurring Revenue and NRR means Non-Recurring Revenue. So non-recurring revenue it seems like installed fees, usage, long distance and even though, I wouldn’t necessarily call them non-recurring but pretty statistically, they’re not part of the pre-billing process.
COGS, you know, you see the 47% there in op expense. So the investments, the M5 team in calendar year ‘10 said you know, we’re little low on support and our customers are not as happy as we want them to be. So they made a conscious efforts to invest in operations and data centers and some of the support mechanisms. So that’s what drove profitability down a little bit lower in calendar year ’11 even though they had a pretty good increase in revenue of over 50%.
So as I said, on our analyst call, the business is about breakeven in terms of cash flow and operating income. These are all non-debt numbers by the way. In calendar year ’11, kind of just a little bit lost on the net income. Obviously, that interest expense line down there, M5 currently have some debt, that would be paid off with acquisition that will go away. We’re going to take on a little debt to fund the transaction. But, that $1.1 million of interest expense goes away.
So some key metrics. So MRR, as a percentage of total revenue, 84% so that’s how much you know kind of recurring in nature. The growth of that business was 45%. So it didn’t grow. The calendar year ’11, a number all through just installed fees and NRR and reselling hardware any of those kinds of things. A lot of it came from building up the monthly recurring business.
Total customers of 2,000, total seats of 62,000. So you divide those, you get an average customer size of 31. You take 31 piece per customer times the $63 you see they are the ARPU; ARPU is Average Revenue Per Unit or average revenue per seat. You take those and you get the $19.48, which is the average, the monthly recurring revenue per customer. So it’s 31 times 63 gets to the 19.48. You take that $19.48, the revenue per customer times 2,000 customers and the Cloud business is exiting December with about $3.9 million of MRR baked in. So that’s the ongoing run-rate going forward.
Now the key to any recurring revenue business is churn. Churn of 5% on a monthly basis. That’s 0.4%. So one of the lowest churns in the industry; the best I have seen and I was at a web hosting company in my early days. So the key to making this model work is managing that churn actively and Dan and his team did a great job. You know, any time the customer subscribe all of these you know, they can put their MPS score and they’re on it in a minute. So that’s something we will measure and report on. And then you see the channel mix there. That’s you know, an update on M5 in terms of some of the key metrics we will be sharing with you guys.
So onto synergies. So as you heard from a number of guys, the largest synergy we expect from a revenue standpoint is really the ShoreTel channel partners signing up to sell the Cloud solution. And again, this is a sell work model today. So the Cloud business will bill the customers directly and the partners will get a referral fee as long as that partner customer continues to pay.
We do expect some uplift in the overall business, because now M5 is part of the ShoreTel brand, better recognition, less questions about viability, if they’re going to out of business and things like that then any private company would typically get when selling to a larger customer.
Lead-gen, we form a lot of lead-gen. We spend a good chunk of money on every quarter on lead-gen and there are some leads that are under 50 lines that probably aren’t worked as actively by our partner base as those bigger opportunities. So we’re going to take those fifth lines, those leads that are under 50 lines and move them on to M5 day one so they can go actively work those. So we expect some revenue from there.
On the phone business, so this no revenue that M5 or ShoreTel gets today, because what happens typically in a solutions is, in a service, the phones are often provided by Cisco reseller, sells direct to the M5 customer. So when we get the ShoreTel phones up on the M5 service, that’s incremental new revenue to us. It wasn’t available to us before. We’re certainly going to continue support the installed base Cisco phones as we move forward, we would want those ShoreTel phones as part of the solution.
And then finally, adding more apps. This is software based. The more apps we can add, mobility you saw a demo of today. Adding that, getting that ARPU up is key to success both from a gross margin standpoint and getting the MRR up.
And then, we have the natural cost savings you expect in G&A less bank fees, and audit fees and those kind of things go away from the M5 book. But we also built in and I think it’s pretty conservative, some cost for product development and infrastructure and security that pretty typically, a small privately held company probably doesn’t have the same security levels that we want in a public company.
So all those lead to our accretion analysis, which I said, on our call, be a little dilutive, a couple of pennies a quarter through calendar year ‘12 and then by June 2013, it would start to be accretive to our overall EPS. In the bottom there, you can see the revenue synergies expected in fiscal year ‘13, $1 million to $2 million and a lot more in fiscal year ‘14. But, hopefully, I put together a pretty conservative model when we put the accretion dilution analysis together.
So the go-forward model, how does this all come together? So again, I am going to show you a couple models of fiscal year ‘12 that will have one quarter of M5 revenue in it. And then fiscal year ’14, so you get a better idea of what we look like in the future.
So from a revenue split, and this is most likely to have show up on our P&L. So we will have a services line, a support line, and a product revenue line. The services line will be the M5 business plus our services business. We have around $2 million a quarter of services business from an installation fees, professional services and training. Don and his team helped manage. So that together with the M5 business will be the services number. The support number is the maintenance contracts I talked about earlier. And then obviously the product revenue is the premise sales of the PBX system. So that’s the breakdown of how we see that progress over the next couple of years.
MRR versus NRR, monthly recurring versus non-recurring, one quarter we’re in fiscal year ’12, so again this is support maintenance contract for the premise based side and then the M5 MRR business only. So 86% of their total revenue. So that will be about 21%.
And then we will quickly move when we have full quarters work, so about 30% of our revenue. And then the way I look at this is that’s the recurring revenue I can count on and then there’s some other revenues that is pretty stable and consistent and that's the NRR for M5 that's the services business from us and then we have a good chunk and it's about 15% of our premise-based business, that's what I call small add-on orders. So this is the phones and switches that customers add on after they install.
So you put those three together, that's about 19% of our total population and which would come out of that 69, so I look at it. There is 31% of MRR, there’s 19% of this other more stable predictable growth. So fundamentally I have around 50% of our business now that is changed into a revenue stable growth I can count on every quarter, every year. And that changes you know how we run the business, predictability, our ability to forecast all those kind of things. So this is a huge benefit, CFOs love recurring revenue and this is one of the benefits of it.
So I'm really excited about having that kind of stability in our revenue base. Split by channel, so M5 goes direct to customers, we are not planning to change that. So again fiscal year 2012 has just one quarter of that, that’s why it is only 6%. Our value-added distributor business has been ramping up significantly and as I said, so by the time we get to fiscal year 2014, our biggest channel will actually be our VAD.
Now certainly our service providers will still be as part of the value-added resellers and our Gold and Silver partners are the main thrust of that business, very key to us. They are what’s driving the revenue engine today and they continue to perform well. But over time our economics from the channel will change as you can see.
The balance sheet, so here I have the ShoreTel December 2011 balance sheet and then what it would look like at closing. So let me just take you down the lines a little bit. So after closing I expect we will have around $50 million in cash, we will pull a line of credit to do that. M5 has a little bit of AR, just a tiny bit of inventory, the regular Accounts Payable liabilities and then you look down to the deferred revenue line, you know majority of deferred revenue is on the ShoreTel books. There might be a little bit for some product deals that we may have to defer.
And then there is deferred payments and earnouts. So that’s part of our deal with M5, there is about $40 million of deferred payments earnouts based on hitting a certain revenue goal for calendar year 2012 and if you do that, then we will pay that to the M5 shareholders. So that’s most of that 18.8 and then they have a few deferred payments from their earlier acquisitions that we are carrying over.
Long-term debt, so right now I'm planning to pull around $25 million in terms of the line of credit. I will talk a little bit more about that in a minute. And there will obviously be a big number in there for goodwill/intangibles on the balance sheet which is the difference between the purchase price and the assets we are acquiring.
So that's how the balance sheet looks, just an acquisition update from a cash flow perspective. The capital requirements are a little heavier on the cloud business as you would expect about $1 million per year. So I am modeling about $7 million-$8 million of CapEx per year between the two businesses. Still we expect with the numbers and projections we are making that will generate a steady amount of cash flow from operations and free cash flow in 2013 and 2014.
At the end of the day, we’ll still have about $75 million of liquidity between our cash and the $25 million more on the line of credit. Like I said I am about to finalize the line of credit. We will do it right before we close. We have got a great rate with a great bank, a five-year term interest only, the rate will be less than 3% and there is a few minimum EBITDA covenants and cash requirement covenants. But definitely something we feel like we can operate under with no problems.
So the moment of truth in terms of the growth expectations for fiscal year 2013, it's a little complicated. So I'll make sure I take you through it and we could certainly take some more questions later. But overall on an organic basis, you know without the benefit of the M5 revenue year-over-year, we expect 20% to 25% growth and that will come from the premise-based ShoreTel business growing 20% to 25% which will be higher than our fiscal year 2012 numbers and then the M5 business to grow at least 20%, my stress is on at least.
So that’s the organic number, from an inorganic model you know what we will report right because again we will have one quarter in fiscal year 2012 and four quarters in fiscal year 2013. We expect that will be about 40% to 45% growth on an annual basis is what the revenue will look like.
And obviously with that kind of revenue growth, you'll be able to see a little bit more leverage in the P&L that we are committed to. Gross margins on a combined basis will come down a little bit because M5 is running at about in the high 40s and we are at 66. We merge those two together based on the revenue contribution, the gross margins will be 62% to 63% in fiscal year 2013.
And with all that, we do expect we are going to deliver 3% to 5% non-GAAP operating margin in fiscal year 2013. That's our commitment to our investor base. Now how are we going to do that is probably the next big question on your mind. Well you know we expect the market to grow close to double digits in fiscal year 2013, similar to 2012 so nothing great. I’ve kind of modeled sales are to be flattish. I did not model it down, but as we said I think there is a lot of things we haven't placed that will increase it.
We will continue to hire mostly in the US with a little bit overseas and continue to find leads in, but the big changes will be the whole G&A marketing expenses relatively flat and we will reduce our investment in R&D as a percentage of revenue.
So some of that will come naturally because the cloud M5 division has a smaller percentage of revenue, some of it will come through leverage and some of it will come through us not investing as heavily in R&D as we go forward and get that down to 16% of our revenue.
So that's where the leverage will come from to get to that 3% to 5%. And then finally we have tightened up the target model, we did a lot of modeling and projection and we are not calling this the long-term model, we are calling it what we think we can do at $425 million and certainly if we hit our fiscal year 2013 goal, there is no reason why in fiscal year 2014 we can't be at this number of $425 million in terms of revenue and these are the non-GAAP percentages.
So we get a little bit more leverage out of R&D in sales and marketing and a little bit in G&A. And we are up to 13% operating margin which you know from a net income standpoint we have about 51 million of NOLs on the books available to offset income. So we’ll have a relatively low tax rate. So I do expect that this will generate a significant amount of net income in EPS for us in fiscal year 2014. So that is you know the overall target model.
I think we’re ready for Q&A. The staff ones to come up.
So we’ve got a whole team up here. So you can ask questions. Steve, let’s start with Steve.
Thanks for taking my questions. Looking at the growth assumption for 2013, I guess, that it’s 7% or 9% market growth, 20% to 25%, hardware Premise growth. You know, based on the guidance, next quarter we’re looking at 7% growth for the hardware business. Call it somewhere around 10%. Is it reasonable to assume that the market is going to reaccelerate and that ShoreTel would be able to return to that kind of growth level for the Premise business.
So, for the current quarter, your numbers are correct, I think. For the fourth quarter, they’re a bit low. Our growth is higher in the mid-teens. And the investments and changes we’re making that Mike and I explained in sales, every confidence we can get to the 20% growth next financial year. So, that’s what it’s based on. So, it’s not a change in the market. It’s a change in us putting the resources in slightly different place, plus continuing to higher sales.
Yeah, I mean the way I look at Steve is, the street consensus is about 16% to 17% growth for our fiscal year ‘12. So what we’re seeing is for ’13, that’s going to be above 20.
You started fiscal ’12 at kind of 35.
35 we did in fiscal year ‘11
That was a big hope, right? To achieve that level. I think you are baking in the economic rebound here or…?
No. It’s just our execution and in improving that, we were at 22% in quarter one this year, 22% in quarter two. Granted quarter three lower, back higher in quarter four, and then back to plus 20 quarter one next year.
So, Steve, you know, the key drivers on driving the revenue growth to get back to you know, those types of increases on a year-to-year comparison, are sales heads and lead generation.
And we’ve done it before and it’s a matter of putting the investments there versus some of the other categories that Mike described. It’s absolutely doable. We have win rates in order to do that. It’s simply getting us in front of more opportunities, with more channels.
Just thought of check with you on your coming departure, sort of how long has this been in your thought process, and what sort of the replacement strategy?
So, first of all, my departure has nothing to do with ShoreTel at all. And it’s completely indicative of my personal goals. So, in terms of how long I’ve been thinking about this, I’ve actually been thinking about this for years, as you know the question that I am sure a lot of us struggle with which is you know, how do I give back and how do I make a difference.
So for me, it was first about hitting some of my personal financial goals, which I have done, because to go in to this second half of life, you pretty much have to be financially independent. And so, I am really excited about that. Of starting the second half. I feel like I have got another 10 to 15 years of good working years ahead of me. And you know, I hope to make a difference. I mean, it’s been very nice receiving all the emails from our partners, and from our sales reps, wishing me luck on this. I feel like I haven’t done anything yet towards that, and don’t deserve of the praise they’ve given me. So, I’ve got a lot to do but I am really looking forward to it.
On the replacement, we're actually placed on with, two people, both of them internal. I can displace this role in to international, USA, Canada, North America. I want as much focus on revenue growth. The question Steve answered, this is part of the answer. You accelerate and we’ve haven’t talk about as much about international but there is lots of upside international they are both internal and we’ll be making announcements shortly.
Probably a question on the financial side, but I think Dan might want to speak to some of these too. Coming back to the numbers, I mean, ShoreTel has posted terrific numbers over the past number of the quarters but still not usually profitable. These are the first time I have seen numbers fromM5 Dan, and your (inaudible) to breakeven. You talked about the benefits of the recurring revenues being an ongoing profit generator. Your CGS though are going from 50 to 47 points. So, there is some,, maybe some economies of scale as you’re growing, but it’s still eating up pretty much all of your net margin at the end of the day.
So I am just asking, with two companies that are basically making, barely any money right now, entering a high growth market place, what assumptions are you going to make on comparative responses of the market to drop prices that cut in to your margin, and conversely, you talked about some savings, a few million maybe from the combined synergies on G&A and stuff like that. But I am still having trouble seeing a bit, where that kind of ramp up comes, and at what point, do you start getting some economies at scale in this business, going against what we probably see some pricing pressure from collateralization?
And yes, to your point Peter, international, I think is huge. Margins are good there. But again, there’s going to be cost to really scale that business and really see develop this channel. So, I am still having a little trouble seeing, some of that financial roads you picture at the end of the day. You’re starting on a great basis. But I am just looking for some of those drivers that are going to make the difference.
Let start Mike on the overall model. And let’s go to Dan why he is confident that even though there is obviously pressures in the market place, we can get the model do in plants?
Yes. So, fundamentally, I mean the biggest driver is really dropping that R&D rate from 20% to 16%, four point margin that’s come out. Right. If you can keep everything else stable ,that all flow to the bottom-line. So, that’s three to five points right there, which is our goal for fiscal year ‘13
Certainly we will have the revenue synergies, and we don’t have a lot of revenue synergies built in the model in fiscal year ’12. It’s more of an acceleration in fiscal year ’13. So it’s really R&D and then strictly invest, not strictly but mostly investing in sales at the quota-carrying people and lead gen.. That’s a big difference on what we’ve done in the past and we’ve built up lot of infrastructure. So, we feel like the company will be able to support a much faster acceleration of ramp going up the infrastructure to do it.
So going back historically, on that drop in gross margin. The context there was we came out of a recession, where we fought through in to an explosion. And very quickly, that one year corrected some of the under-funding, and the networking people went from 100 to 200 people very quickly.
And so having done that, we’ve seen tremendous productivity improvement as the staff have baked in and we can forecast where we can get in to this conversation with our with investors now of better economics but you make those investments, you get clear margin for ever in our recurring model and your are really in control of the only lever being how heavy your foot is on the pedal? How much you want to spend on sales and marketing. So it very clear to us, we are very confident we see the natural. We see that adds opportunity, that is not even modeled on top of that and it seems to us very clearly like we would be able to generate the cash to make the investments to be the leader here.
And just one other thing on R&D. The ratios because of the increased revenue get you to the 16% and then ultimately 15% in an years time. But I don’t want anybody taking away that we haven’t got full confidence in the roadmap, making the right investments to stay competitive. It’s just the scale that’s finally helping us to get to a percentage of R&D versus revenue that is much more of an industry norm.
Right. Now, that you on the hostage side becoming the service provider and the provider of the telephony service, what kind of confidence do you have with your service provider, channel partners now that you’re essentially a competitor. Also with the internal sales forces at AT&T, are you planning on doing that with some of your other service providers?
Such a good question. That was probably the one channel that we’re most interested to see how they would react because they do so on their hosted services. And across all four of the major service providers in the U.S., their reaction was slightly on the positive side. So, now one’s saying great. How we sign up for M5 tomorrow. No one has raised any major concerns but they’re looking at it as well this is something that we will have to investigate more about. So, you know, I am looking at it as it’s a potential opportunity for them to look to have a resale relationship with M5 as their that is will be a differentiator compared to what they are doing today with these Broad soft business scale now there is one service provider that we are launching to manage services with very shortly where they will be reselling ShoreTel equipment for that monthly recurring charge on our on premise basis so there is an opportunity to work with the service providers for a monthly recurring revenue stream to them and that just may be another forum for so time will see how that works out but they did not have a negative reaction that was important to us.
Can you talk a little bit about the revenue opportunity on mobility and can you talk about the pipeline of fortune 100 customers what will those sales look like and inter potential for them to switch over to ShoreTel on the premise based business as well?
The revenue are still modest which is why we don’t break them out remember when we bought as you told there was hardly any revenue stream pressures have caught eloquent how it is ramping nicely but it is still not launched enough to break out and then to your point we now have PBXs, Cisco Avaya overtime now that they understand the value proposition better. Clearly it is what I call Trojan horse strategy we have an opportunity to replace the PBX down the road it is much easier when you already talking to the customer that w anted to call cold.
The only thing I will add to that is the majority of the opportunity that we see particularly what we would define as the global market, the larger than 5000 user base is a significant Boyd boom, the mobile device boom has opened the doors to a larger user population being a potential end point for us. So as we ramp up those deployments in phase then we’ll expect them to see a broader user population then just a typical, CXO level or sales level, we see that going out to most of the knowledge workers. So it is a significant opportunity.
Thank you. You’re going to begin nice levels on the R&D line, but in terms of G&A, Mike, you mentioned, you’ll kind of keep it flat, but you’re ramping hiring with the sales force. So how does that work? Where you’re taking out of your continue to add to the sales force to keep G&A?
I mean we’ve done a pretty good job of investing in systems over the last couple of years. We’ve a little bit more work to do, but we’ve put in place a lot of things that should scale up naturally without adding a lot of headcount, whether that’s in collections or things like that. And the value add distributors or VADs right, that has helped across the organization, whether it’s, I don’t have to hire as many collectors because I am collecting from one VAD versus 400 order add, mainly one order a day from a VAD versus 400 orders from 400 VADs. Those kind of things. So that scale can grow nicely with the VAD business without adding infrastructure in the G&A area. I mean that’s one example where that kind of savings will come from.
Yeah, and I will just ask Rick to come up, because when I first got to the company, I asked Rick to lead a, probably should I say our CIO to lead project on scaling the business and we’ve made a lot of investments very quietly there that are beginning to pay-off. And then also, Rick has got a plan to enable M5 also to scale the business. So we’re making investments there; so perhaps you could say just a couples words about that Rick. This will be the day one experience.
Sure. Relative to the M5 acquisition, the day one experience is still under negotiation. But we’re targeting late April to fully integrate our IT environment at a company level. And then relative to scaling the business, as Peter mentioned, when he got here, that was a key initiative for him. We have 18 projects that we’re working relative to improving the scalability in ShoreTel. Three of those have been completed. I believe we have another nine in progress and few others queued up at the start here in the near future. So we are making good progress that will make us more efficient as a company and help for those costs.
And we didn’t build a lot of these infrastructure costs in to our model to ramp-up the M5 business, get them on the same email system, sales force, like those all kinds of things are baked into our model.
Just a question for Dan on scaling the M5 business, if you’re providing the transport, does that mean you have to put local infrastructure in every market you go to or how does that work?
No. We do it through Telco partners that provision the local loops and we’ve used that as a breed. We have a number of vendors building our network across the country. So we don’t have to do that.
Hi thank you. Just, I think I definitely missed this, well I definitely missed it. How much in MRR today did Dan have at the end of December, did you mentioned?
If you take 19.48 times 2000, that will get to $2.9 million of MRR, as we’re exiting December.
How many sales people do you currently have?
Our sales group overall is about 10 quarter carrying outside guys, but there is a channel organization, inside sales organization qualifiers around that. So our sales productivity per rep is quite good right now.
Yeah, what kind of quarter do you run rate them?
Mike, again no jokes, sorry. Yeah.
It’s a new game for me.
I understand that. I should have asked you all. And then what percentage of your customers are not taking your Telco or is it (inaudible)?
Okay, Mike do you want to?
Yeah, I am fine with that.
I think it’s something in the order of 20% right now, 18%, 20% of seats, roughly that come with their own way of network and it’s a trend that we’ve seen increasing particularly with larger accounts.
Hi, just want to go back to the Mobility question, I guess we understand it takes a while to ramp large enterprises in their prior phases; is there sort of a rough guiding we can think about in terms of maybe by fiscal ’13 that could be 10% of sales. I guess, any hard sort of actual you can think about?
Well, I won’t give you an exact number because Michael shouldn’t -- you’ve got to look at this as an exponential curve. It’s certainly very flat, it’s accelerating. So by financial year ’13, I do believe it will curtail, we’re on the right track.
Just, with all you guys up there, your thoughts on how you see the big service providers responding, once as you transition more and more the M5 business, that’s going to be something that’s going to be easier for them when they’ve got to have to jump in at some point. Again, I just want to hear your thoughts on how you anticipate, market competition to react, especially from the big guys who own most of the business already?
Well, to some extent, they’re already because Verizon is Broadsoft, AT&T is Cisco. So Dan, I think explaining how you compete and why you win?
Yeah. I mean, we definitely think that over the long run, this can become a very big business and Telco’s will have an offering for Cloud people that drive cost down. But we compete and experience they can match to drive service up while you’re driving cost down. So a nice analogy to think about is where rack space is done. You would think big infrastructure, where is the room for specialist company. Those guys have come in and built the $1 billion business on a differentiated experience. It’s growing like crazy and is valued and extreme output. It’s a terrific analogy for what we want to do here.
And there is nothing long-term residual, we won’t have it short-term where, they couldn’t look at software and an IP we’ve got and be interested in working with us in someway. But that’s a very long-term play, there is nothing short-term because they’ve all invested in alternative and they’re not going to change pause anytime soon. But you never know.
Just to that, any possibilities for white labeling that group?
You know, as I said before, what's missing from the model is that a Telco buys Broadsoft, or Heritage Cisco and they only have one piece of the solution, we’ve built a full stack. So enabling that is a very tempting opportunity and its something that we’ll have to work out, but you know, as we’ve said, focus, execute this plan fiercely together and then look at the very long list of opportunities that we’ve opened up by combining.
Never rule anything out but the intention is to not white label. We’re building a brand. You know, salesforce doesn’t white label. We’re building a brand, to either top right hand corner of that category. It's going to be ShoreTel brand that means to win this category. So you never rule anything out, but that’s not the plan.
Anybody else? I know it’s been longer and you have been a very good audience. But I don’t want to cut any question short.
Alright. Well, let me thank you all very much. We’ll formally end the webcast now and appreciate everybody on the web. Thank you for participating. Thank you again, and well then have a more and informal Q&A and some cocktails just here. So thank you again.
And make sure you do your survey. That will be very helpful for us and I do want to thank Tonya Chin, who did a marvelous job putting the whole thing together. Thank you Tonya. Thank you, again for coming everybody and we’ll speak with you. And if you want a tour, we have that going too, right. Thanks again.
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