(By Kevin Donovan) ShoreTel, Inc., (SHOR) develops and sells what it likes to call "brilliantly simple" Internet protocol (IP) communications systems for enterprises in the U.S. and abroad. The investment proposition is simple, too. The share price has been battered to the point where evidence of business growth could catapult it higher.
The company's systems are based on its distributed software architecture and switch-based hardware platform that enable a single system to serve multi-site enterprises. ShoreTel has more than 20,000 customers in its premises business and 5,000 on the cloud side through its acquisition of M5 in March, according to management. Its products are available in 47 countries.
According to the Synergy Research data, ShoreTel ranks third in the U.S. telephony market and increased its U.S. enterprise IP telephony revenue market share from 6.5% in 4Q11 to 7.7% in 1Q12, growth of 19%. In contrast, the Synergy report shows Avaya and Mitel both experienced declines in market share of 9% and 4%, respectively.
ShoreTel CEO Peter Blackmore says the market share gain reflects "prior investments in the company's sales team, distribution, product development and branding" and that the company is positioned for "significant long-term revenue growth and worldwide momentum."
Evidence of that momentum is sorely needed to shore up (pun intended) confidence in ShoreTel. Key to investor perception will be fiscal fourth quarter results in the cloud sector, which, along with mobility, is an area management has identified as a focus for growth. The fiscal fourth quarter, ending June 30, will include the first full period of ShoreTel's foray into cloud.
Returns to shareholders have been dismal. Shares have lost 41.3% in value year to date. We're no technical analyst, but the chart looks bad.
ShoreTel's results in the latest quarter were generally in line with expectations. It reported operating EPS of negative $0.03 vs. a gain of $0.01 in the year-ago quarter.
Nevertheless, the share price has suffered along with fears that Europe's woes and an economic slowdown will curtail enterprise spending on communications and information technology in general.
But we think the share price has sunk to a level that could be a good entry point on the cusp of operating profitability.
Analysts' mean estimate for operating EPS in the fourth quarter is for a loss of $0.02 vs. a $0.03 gain in the prior year quarter. For fiscal 2013, analysts expect $0.15 in EPS. That translates into a forward PE of 25.5. In comparison, competitor Mitel Networks (MITL) sports a forward PE of 80. If Shoretel can deliver, a prospect we view favorably, its multiple should expand.