Mitel: Back in Black

New management and its new channel strategy appears to be paying off for Mitel. The company just announced its Q3 FY 12 results. “We are pleased to have delivered revenue, gross margin and non-GAAP operating expenses that were in line with or better than guidance,” Richard McBee, Mitel CEO, said in a company statement. The company now has four quarters in a row of year-over-year growth. Here are some of the key highlights:

• Total revenue of $164.4M. Revenue from continuing operations for the third quarter of fiscal 2012 was $150.5 million, up 5% from $143.9 million for the third quarter of fiscal 2011. This excludes revenue from discontinued operations of $13.9 million in the third quarter of fiscal 2012, and $18.1 million in the third quarter of fiscal 2011.
• Record gross margins of 50.9%. Gross margins from continuing operations were 54.4%.
• Adjusted EBITDA (as defined below) from continuing operations for the third quarter of fiscal 2012 was $21.0 million, up 30% from the prior year quarter.
• Non-GAAP net income from continuing operations for the third quarter of fiscal 2012 was $12.0 million, or $0.21 per share, compared to non-GAAP net income of $7.4 million, or $0.13 per share, in the same period last year. Non-GAAP net income per share from continuing operations was up 62% from the prior year quarter.
• Net income from continuing operations for the third quarter of fiscal 2012 was $4.4 million, or $0.08 per share, diluted, compared to a net loss of $4.9 million, or $0.10 per share in the same period last year.

Mitel executives cited research from MZA that it holds the #3 market share position globally and in the US, and #2 in the UK.

Selling DataNet/CommSource

The big news was Mitel intends to sell its distribution arm DataNet/Commsource. This division distributed third party complementary telephony and networking products. According to CEO Rich McBee, the primary purpose of this division was to equip Mitel direct sales with a broader portfolio of products. The division is no longer strategic as Mitel ceased its direct sales efforts.

DataNet/CommSource was the result of acquisitions made by Inter-Tel which Mitel then subsequently acquired. The unit was a distributor servicing Mitel dealers, but oddly didn’t actually distribute Mitel’s own products. This division never made any sense for Mitel, and it’s good to see Mitel untangling its business.

The Mitel TalkingPointz Research Report discussed its three separate units compared to Mitel’s strategy of simplifying its business and stated:

“The fact that Mitel is in three separate businesses—communications software, network services and distribution—does not appear to be on the table either. DataNet/Commsource and NetSolutions contribute profit, but the three businesses together still seem a lot like three businesses.”

Since then, Mitel integrated its networking business (MNS) with its core operations (MCS) much tighter and even experienced significant growth with Mitel AnyWare and Mitel Mobility. Proceeds from the sale of DataNet/CommSource (likely to an existing two tier distributor) will be used to service existing debt.

Channel News

Less than a year ago, Mitel announced a major shift to end channel conflict and direct all new sales toward the channel. The company has now hired about 30 sales executives throughout FY 12 to drive business toward the channel. The company has learned a couple of important lessons in this process:

• It takes about six to nine months for these sales executives to build their pipe. Many of these executives were hired about six months ago.  
• The deals landing in their funnel are generally bigger than expected, and thus taking longer to close.
• Mitel has been expanding its channel, including six new major partners expected to deliver $1M in sales per year (after ramp).
• Black Box renewed a five-year agreement as a major systems integrator.

Mitel expressed confidence regarding its new channel strategy, and intends to continue recruiting new channel partners.

Hosted News

Also in its quarterly briefing, Mitel took credit for its three-pronged strategy in the emerging hosted services business.

1. SPs: Mitel’s MCD is available in a version optimized for service providers. Mitel referenced 15 global service providers and six large enterprises running this multiple instance and mutli-tenated platform.
2. Mitel AnyWare Hosting: Mitel also offers per seat subscription services, sold through its Mitel Network Solutions business unit. This service is targeted to accounts with 20-250 users and delivers an average price per seat of about $50/mo. Mitel AnyWare is based on Mitel’s core technology.
3. Mitel AnyWare is also available in a wholesale non-branded offering that partners can leverage and brand into their own solution.

Mitel acknowledged the competitive landscape in this sector continues to change, and feels well positioned with consistent technology for both premises and its hosted models.

Virtualization

Mitel has bet a significant portion of its strategy and R&D on virtualization solutions with VMware. Mitel reported it doubled its virtualized licensing in Q3. It also announced last month that its Contact Center solution can now be virtualized under VMware’s VDI solution (View). Mitel reports its relationship with VMware is unique at the R&D level, and claims an increasing number of VMware partners are coming to Mitel for fully integrated solutions.

Mitel reported its numbers with DataNet/Commsource broken out as “discontinued operations” to facilitate future quarterly comparisons. DataNet/Commsource, which reported significant growth in Q112, contributed $13.9M in Q312 revenue.