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ShoreTel Acquires M5 Networks - a Hosted UC Pioneer

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Since I began at ShoreTel, a little over a year ago, I have believed that the company needed a cloud UC offering to complement our on-premise business. Over the past year the management team and I have worked diligently with our board to identify the best entry into this attractive market.  I am excited by the opportunity a combined ShoreTel and M5 presents. The market for premise-based PBX is large and growing. ShoreTel has momentum, and we plan to continue to gain market share by growing our core business significantly faster than the growth of the overall on premise IP PBX market.

The addition of a cloud UC offering is a very important strategic move for our company.  I am confident that the combination of ShoreTel and M5 will create a formidable solution that is unmatched in the marketplace. ShoreTel is now uniquely positioned to provide customers a choice between on-premise and hosted UC solutions. I am excited to announce today’s news regarding ShoreTel’s planned acquisition of M5 Networks, a leading provider of hosted UC, based in New York City.

Some of you may be asking how this makes sense.

M5 Networks is a well-established cloud communications company. They are a recognized leader in cloud-based business phone systems. M5’s advantage comes from a combination of well developed proprietary phone system software with a passionate focus on the customer. The result is a very easy to use system, which perfectly aligns with our brand promise of brilliant simplicity and excellence in customer satisfaction.

Cloud strategy

As I communicated at the beginning of this fiscal year, we are continuing to aggressively grow market share for both U.S. and international in the core premise-based UC business, ensuring that we build a successful ShoreTel Mobility business, and introducing a cloud-based hosted solution. M5 is the answer to our entry into the cloud UC market.

Hosted market

Founded in 2000, M5 has achieved real market traction in the hosted space with 2,000 customers across the US, annual revenue in the high $40 million range and a “visionary” position on Gartner’s Magic Quadrant for Unified Communications as a Service, North America. With this acquisition, we have an opportunity to take a leadership position in the hosted space that is growing at 36% CAGR from $700 million today to an expected $2.2 billion by 2015.

The combination of ShoreTel and M5 enables us to continue to expand in the on-premise market and enter in the faster growing hosted UC market – and we will be uniquely positioned as the only company that provides customers a choice of both on-premise and hosted UC solutions.

Buy vs. Build

The secret sauce in hosted UC is not just a well-developed R&D solution but expertise in a very different business model involving low cost acquisition of customers, a very low churn rate to maintain revenues, a high ARPU and expertise in running 24x7 data centers. The management skills that are required in the hosted model are in many ways different from ours and building up this expertise takes time.

Our team is 100% focused on providing our customers with the premier on-premise offering. Trying to provide hosted services as well would take a long while and be a distraction to our on-premise business we could not afford. The only way to enter this market quickly and take a strong position was to acquire a company with a proven business model and a good management team.

Ultimate choice

ShoreTel will be uniquely positioned to give customers ultimate choice. We know that customers tend to make a decision to buy on-premise or hosted before they approach the vendor. Today we miss out on the hosted market. With the acquisition of M5, we will be able to address their needs with no compromise. For those customers who are unsure whether a premise-based solution or a hosted solution is the best fit for their business, we will be able to provide unbiased advice to help find the ideal solution.

ShoreTel’s premise-based solution will continue to be sold through resellers, with no changes to that distribution model. The hosted solution will operate as a separate business unit with the go to market model they have today, which is a combination of direct and channel referral.

ShoreTel resellers will be able to add the hosted business to their portfolio once they are certified, thereby complementing their on-premise revenues with a recurring revenue stream.

A new ShoreTel

This is a very important and strategic move for our company. We shall offer best of breed solutions for both on-premise and hosted UC. We are the only company that does this in a pure play approach. Our job is very simple – to continue to lead the market in on-premise solutions that have the best TCO and highest customer satisfaction rates, and rapidly gain share.

In addition, upon the close of the transaction, we will have a leading hosted solution with the opportunity to gain a strong position in share in that fast-growing market

The combination of ShoreTel and M5 will enable us to better meet the needs of a broader set of customers, accelerate our growth, and become an even stronger leader in Unified Communications.