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Mitel's Strategy: Mavenir… and Beyond
When Mitel announced earlier this year that it was acquiring Mavenir Systems, a vendor of cellular network software, not everyone in our industry was sold on the deal. But to Mitel CEO Rich McBee, it was pretty simple: Mavenir adds a third "pillar" to the company's growth strategy, and gets it into mobility systems, where any communications vendor needs a play.
All that stuff I knew or pretty much assumed when Mitel announced the deal. What I didn't know, but which McBee told me when I visited the company's Plano, Texas, offices earlier this month, was that Mavenir, based in Richardson, Texas, had been on his radar screen for three years. McBee told me that the mobility vendor's growing business in cellular networks and its all-virtualized architecture -- which echoes Mitel's own fast move to virtualization on the PBX/UC side -- made it a natural fit.
For the near term, Mitel will continue to try and build Mavenir's business with cellular carriers, using Mitel's strong global presence, especially in the EMEA region, to add heft to Mavenir's sales and support operation, McBee told me. While there may be some product integration between Mitel and Mavenir systems down the road, for now Mitel will try to keep Mavenir gaining accounts and scale with the carriers, without necessarily integrating much from the Mitel product set. Eventually, he said, the mobile network carriers will need to expand from their current near-exclusive focus on consumer customers, and will find the adjacent enterprise mobility market appealing. At that point some product integration may come into play.
In general, "it's a long-term play," McBee said of the Mavenir acquisition.
It won't be the only play, however. McBee made it clear to me that, when it comes to Mitel's core market in enterprise communications, the company is "going to continue to consolidate the market." That means that Mitel, which swallowed up competitor Aastra last year and PrairieFyre, a small contact center vendor in 2013, will remain on the hunt, even if it did abandon last year's bid to acquire ShoreTel. McBee said he sees the legacy vendor landscape consolidating and that he intends for Mitel to be one of the handful of suppliers still standing when this consolidation is complete.
Since taking over Mitel in 2011, McBee has built a solid financial base for the company, which now has about $100 million cash on its books. He told me that with the legacy CPE business flat or declining, Mitel's strategy for organic growth (in addition to growth by acquisition) is built on three pillars: cloud, contact center, and mobility.
We've already talked about mobility; contact center is the smallest of the pillars but one that most vendors in the communications space feel they need. It's the cloud business that's shaking things up right now for Mitel. Like most UC vendors, especially those that serve SMBs as one of their markets, Mitel is transitioning much of its business from a CPE to cloud model, and has taken a hit on revenue as it shifts from an up-front to recurring-revenue model. Still, Mitel seems to be making progress on this front; in its last quarterly report in March, product revenue was down $6 million year-over-year, while cloud services revenue was up $4 million; together with an increase in services revenue, the company overall saw a year-over-year (Y/Y) gain for the quarter.
And its cloud numbers are growing significantly. In 1Q2015, Mitel reported doubling its recurring cloud seats Y/Y to about 305,000, with its total installed base of cloud seats at 1.4 million, up 82% Y/Y. Average revenue per unit is inching up, hitting $50/month, and average number of seats per customer grew from 32 in 1Q2014 to 39 in 1Q2015. That average customer size points to the reality that UCaaS is still mostly a small-enterprise play.
The next couple of years are critical for Mitel's cloud business, McBee said. Providers in the cloud space average a 17-month payback on the investment made to acquire and service a customer, he said, and Mitel has relied on three- to five-year contracts to build a profitable cloud business. The first of those contracts are starting to come up for renewal, so keeping those customers and getting them to re-sign is crucial to continuing Mitel's momentum in the cloud.