Transcript for Conversation with Don Joos of ShoreTel
Jim Burton: Welcome to UCStrategies Executive Insights. This is Jim Burton and I am down in the middle of Silicon Valley visiting with ShoreTel and their CEO, Don Joos. Don, I understand yesterday you were in New York City at the NASDAQ. Can you tell us why you were there?
Don Joos: Yeah, it was an exciting day for the company. We were in Times Square, we were at the NASDAQ building, and we rang the opening bell for the NASDAQ market. We also had a pretty comprehensive press release that came out and the ringing of the bell really was a recognition of a major milestone for the company as we officially announced the rollout of our next generation platform, ShoreTel Connect. And now, this is rolling out into the marketplace. It’s been a big part of the transformation of the company and an important milestone for us as a business here.
It’s important because it’s really pulling together what we’ve been talking about in our strategic plan. With ShoreTel Connect, we have a single platform, single solution, single code base that, based upon customer needs, allows us to determine whether it can be delivered in a cloud model or in an onsite premise model. But it gives the customer the flexibility and choice, based upon their business needs, how do they want to deploy it. Do they want to deploy it in a pure premise? Do they want to deploy it in a pure cloud? Or do they want to deploy it in a hybrid? The hybrid site, meaning you can mix and match the combination of both – both cloud and premise. But it all starts with having a common platform to work from.
Jim Burton: What if I am a customer now and I say, “Well, I’ve got all my stuff is on premise, I want to move some stuff to the cloud? How do I do that?”
Don Joos: Yeah, one of the things that went into the design of ShoreTel Connect, especially for the ShoreTel install base, if they have ShoreTel – you’re part of the ShoreTel install base today – the beauty of this solution is it’s a software upgrade for them. So as long as they have a support agreement, they’re entitled to that code. And so whether they want to go today from a premise to a cloud solution, it would just be a matter of migrating to our hosted offering. If they, maybe six months from now, want to take advantage of the hybrid offer in this because they’re opening up some remote offices, it’s just a matter of them doing a softer upgrade to that and to that code. And then we would then work with them on a subscription basis for those remote offices.
And I think that’s a lot of the draw for these customers here. It’s an investment protection – where they can make a decision today but they have the choice and the flexibility to evolve their communications model without having to do a rip and replace. And I think that was evident by our Q4 results. Our June quarter, we had a record revenue where I think a lot of people thought maybe we would have a stall in some of our product sales because we were on the eve of this product launch. And we actually saw an acceleration sales and I think it’s really, back to that point, there’s no reason to wait. They can buy now and then it’s just a software upgrade for them.
Jim Burton: Well, for people like me that have been following ShoreTel from the very beginning, it’s an interesting thing. You’ve always provided continuity for your customers and it sounds like you’re continuing that continuity by allowing the customer who’s an existing customer to move to your new products and services, so it should give anybody that’s a new customer a little reassurance that you’re going to be there for them as they move forward.
Don Joos: Yeah. I mean, ShoreTel was founded off the simple belief that there’s a better way to do this. When Ed Basart, the founder, started the company, that was the belief – that there’s a better way to provide communications to small and medium businesses. And that’s ingrained into the DNA of the company, it’s ingrained into how we think about the product. Because it starts with how a product gets architected and then it works its way through the flow, through the go to market, through the service, through the different parts of kind of the lifecycle of an overall product.
And we believe that is just – there’s a better way. And it starts with the customer and works its way in. So that’s how we’ve always approached it and that’s why the ShoreTel Connect, we made those choices.
Jim Burton: So we should talk a little bit more about ShoreTel Connect because it’s a fairly broad offering and certainly, we could simplify it – it’s the services that you’ve had with more integration of other products, which I think you might want to talk about. But just give us some depth to that. And maybe a way to get around this…two years ago, you became CEO and you had a three-step program.
Don Joos: Yeah.
Jim Burton: The foundation and the migration and the acceleration, which I’m assuming that we’re kind of at that acceleration point?
Don Joos: We are there. Yes, we’re entering now the acceleration, which to me, is the – that’s the fun stage. That’s the growth stage where growth accelerates. I think we’ve done a good job over the last two years doing a very unique balance – we have been transforming the company over these two years while simultaneously dramatically improving our financials.
Jim Burton: That’s a tough thing to do. How did you do that?
Don Joos: Yeah, I was going to say, I think we’re uniquely positioned to do that. Usually, most companies have got to pick one or the other and we’ve been able to. And it gets into a lot of this – and I’ll touch on each one – the foundation, migration, and acceleration.
The foundation phase was really about getting our cost model in place to align with the revenue, really to create that leverage in there. So we aligned our cost model to what our growth trajectory was going to be. And you know, some of those are just, necessary steps that you have to make within the business. But part of that cost model was also consolidating our data centers from our acquisition that we had done in 2012, and bringing them all into a single colocation with the new architecture that was going to give us a lot more scalability. Part of the foundation was introducing the historical premise partners to our hosted offering and having them to begin that sales process.
We then moved into the migration phase. The migration phase was the maturing of our channel programs as they got more and more comfortable with the hosted offering. The migration phase was a lot of the heavy lifting by the engineering teams and our network and systems teams in preparation for the development of ShoreTel Connect. And migration was the continued financial strength. It was the predictability quarter over quarter over quarter of our operating income. It was dramatically improving our cash flow from operations and thus, our net cash position. And a great milestone in the migration is where recurring revenue became 50% of our total revenue. To me, that’s a good internal and external validation point of our progress.
With the Connect now being where we are now in the rollout stage, we’re entering the fun stage. This is the acceleration. In the acceleration, this is where our recurring revenue starts to accelerate and becomes a larger and larger percent of our business. Financially, we continue with our strength, we continue to operate from a position of strength. Acceleration is where we take our hosted offering outside the U.S. market – Canada, Australia, and the U.K. are going to be our initial targets. We just announced the plans with the UK. We announced that last quarter all in preparations there.
And so to me, that’s the fun stage because this is now about all the avenues from growth. So as much as we have grown as a business, that was all before a new product launch and so now we have these catalysts for growth coming our way.
Jim Burton: One of the things that I know that you’ve got coming up, I think in October, your channel partner program. What are you doing with them? Because you’ve been – clearly, you’re a channel company. Anything in store for those folks? Any announcements you can tell us as much in advance as you can without releasing things you shouldn’t be doing. Because we have a marketing person sitting in the room that’s going to get on you if you don’t speak properly here.
Don Joos: Yeah. We’ve been a channel-focused organization for many, many years. So our channel programs are very mature. We have very – I would say I think – at least I think – we have a unique relationship with our channel. So the channel has been going through its maturing stages as we have been maturing with our hosted offering. What we roll out is a new channel program, an enhanced channel program, on October 1. That’s the beginning of our year.
What I think is really unique is that our success is, we need the channel to be successful because our success and their success, we work together. And so what we did that I think is very different is we have a business objective, we all want to be successful. And so we actually pulled in the channel community into the design of our channel program. We worked together making sure that we were aligned in understanding the goals that we were trying to accomplish. And we worked with them and they helped us design this channel program. I’ve always said the best ideas are not going to come out of corporate headquarters conference rooms. It’s when you actually get out in the field and you understand the challenges that people face. And it’s always best if you can create a win-win. Is there a way to design a program that’s incenting the right behaviors but accomplishing the goals that we want? And we feel that working with the channel, we were able to do that.
So there’s actually – I think in other companies I’ve seen, there’s always trepidation when they hear a new channel program is about to come about. And here, you have a channel community that’s actually excited because they were a part of designing it, and I think that’s really unique and a differentiator in the marketplace. And I think that because I see the channel as a strategic asset for us.
What happened in the June quarter is a great example of that. We had a – our hosted MRR bookings, we hit a record level. Over 50% of the bookings actually came from our historical premise partners and about 75% of the bookings came from the overall channel. And I think that’s just a great testament to how we’ve been working together so that we’re all successful. That remaining 25%, we have a small, about 20-people sales force, a lot of inside sales activity, and that’s where the other 25% came from. But the channel has just continued to be a larger and larger and larger percent of our overall MRR bookings.
Jim Burton: Do you see a channel conflict there between your inside salespeople and the outside salespeople? I guess more importantly, do your channel partners see that as a conflict?
Don Joos: No. No, I mean, we’ve been very clear in regards to our plans around that. The number of people has been fairly consistent, that around 20 people. And where they focus and the type of customers that they’re focused on right now, they’re doing a lot of the install base, from our M5 acquisition. So we’re very clear about our lead gen. We’ve also made changes in our lead generation process where leads come in through the ShoreTel website. We’re now actually starting to farm those out into the channel. And so to me, that’s just another testament – channel conflict gets nervous where leads come in and then you keep them. We’re actually moving leads into the channel and as they are maturing, they’re all in different stages of the changing of their business model, we’ll continue to be routing out. But I think that’s another proof point of our commitment to the channel.
Jim Burton: You had a number of your channel partners attend our UC Summit last year and we know from talking to them at the Summit that they were very, very happy campers. They liked your programs. And I’ve got to believe if you’ve got a new one with their latest input – because the market’s changing for the channel partners. So I think anything that you can do to evolve to help them figure out how they migrate from selling chunks of iron that got big income to recurring revenue, I think that’s a good thing.
I want to get back a little bit. You announced a new product and it’s an extension of what you’ve been doing. But you had some new features, new functionality, stuff that’s more your own grown stuff as opposed to partnering with others. Can you talk about that a little bit?
Don Joos: Yeah. I mean, the overall ShoreTel solution here with Connect, I mean, it’s all our own intellectual property. So whether you’re going from the switches to the endpoints to the applications, it allows us to control the integrated experience. Now obviously, from an API perspective, we do integrate with other applications out in the marketplace – staffing tools, CRMs, ERPs because those are critical applications to run a business. So we need to make sure that we integrate. But from an overall business communication solution, it is our own intellectual property.
What comes out with Connect is a couple things in there. It’s a lot of features, obviously – I can’t run the through list here – as it relates to more from the platform itself. There was new switches that come with it that are significant improvements just from a capacity and a speed perspective. We’re bringing a new enhanced hosted contact center solution into the market, which has a lot of new capabilities in there both from the supervisor feature functionality, as well as just from a web agent perspective. We’ll have a new client as a part of that that’s a new look and feel from a client collaboration perspective. That’s coming out, and we’re really excited about that and where that goes because you can continue to iterate off that and just keep bringing in new capabilities.
But the new client is just a very natural intuitive way from a conferencing, from a desktop share, from just an overall collaboration perspective and whatever that collaboration happens to be. It has a lot of great capabilities from that perspective. And then, continued on enhancements from a mobility perspective we’re bringing in.
Big a big core part of it was the platform itself, the switches, and then those three applications, those three core areas from an application perspective. We shared a lot of this at our end-of-April partner conference and boy, it was amazing as we were introducing things over those two and a half days with our channel community, just every day watching the energy level build each day as they saw what was coming out. They were getting hands-on experience with it and we sent them off from there ready to roll in the marketplace and start really working this into their sales process. And I think that’s a lot of our channel excitement going on right now.
Jim Burton: Yeah. Well, you can feel the energy in this building. It’s Silicon Valley so there’s always a lot of energy in this whole area but there’s a lot of energy in this building, which you’ve been at. I think I came here the first time at least 15 years ago. It just seems like forever. It was a number of predecessors before you.
But anyway, I appreciate your time today. Thank you very much and good luck with this and I’ll look forward to hearing more about your channel program this fall.
Don Joos: Great. Appreciate the opportunity.