Software meets the cloud at Mitel

When Mitel Networks (TSX: MNW) purchased the mobile communications software company Mavenir earlier this year, analysts shook their heads in confusion.

This was a deal between two completely different companies with relatively no customer overlap or production synergies. Mavenir produced software for large mobile operators, while Mitel sold cloud and premise-based solutions to medium-sized businesses.

Yet, despite the differences, the purchase appears to be worth it.

Mitel saw an increase in revenue for its third quarter ending September 30, 2015, improving to $290.7 million from $272.4 million one year ago, with 15 per cent of revenue coming from that newly added mobile segment. This increase in revenue did not result in higher profits however, as Mitel registered a net loss of $8.1 million for the same quarter, which is down from a loss of $5.3 million one year earlier.

A move to the cloud

The acquisition of Mavenir has shifted the future of Mitel into a new market and, along with cloud solutions, Mitel is setting itself up for a healthy future. Mitel now has mobile end users worldwide, contracts with industry giants such as T-Mobile, and the ability to combine its existing premise-based and cloud software with mobile products to create innovative technologies, such as voice-over-Wi-Fi.

Mitel is starting to look to its newly acquired mobile segment and its increasingly popular cloud division for future growth as it moves away from its older, premise-based communication solutions, says Andrew McGee, an associate at Cormark Securities Inc.

McGee points to a presentation given by Mitel on November 11, where it predicted mobile and cloud revenue to grow at a rate of 20 per cent a year until 2018, with both gross margin and overall percentage growing positively as well. The same presentation also highlights how premise-based revenue is planned to fall at a rate of 5 per cent per year for the same time frame.

Mitel has completed multiple acquisitions in the past two years to help aid its transition from premise-based systems to cloud and mobile. Aside from the Mavenir deal, the company also recently purchased Aastra, a unified communications firm, which offers similar products to Mitel, but deals mainly in Europe.

Buying customers

McGee says Mitel acquired Aastra in order to increase the amount of potential cloud customers. McGee says, in general, subscribers to a company usually do not change companies after a changeover. He says he thinks Mitel is hoping the customers of Aastra will simply adapt to the cloud under the Mitel name, rather than subscribing to a new company. Plus, McGee says there is no difference in the end user experience between cloud or premise-based systems, so the switch to cloud could be a seamless transition and may work well for Mitel.

The Aastra and Mavenir deals are just a part of a expanding company and show why Mitel is a growing force in global communications, says Tony Pereira, Mitel’s vice president of business development and strategic partnerships. He says the purchase of Mavenir may have looked strange at first, but it was a forward-looking purchase because entering adjacent markets is key to the future growth of a business.

“You take an idea and bring it into your business focus and create new focus,” says Pereira. “We brought mobile into Mitel and are now pushing it to large businesses that need private, secure, mobile networks. From there, we can innovate on this and be ahead of other markets.”

Potential for more deals

However, as Pereira notes, acquisitions are not a simple matter.

“An acquisition is not a knee-jerk reaction or a quick buy. It takes time. You need to look at business, use your reason, and think scientifically and logically.” Says Pereira. “We only look to consolidate if it makes sense for our shareholders and business.”

While there have been some rumours about potential deals, including a Polycom-Mitel merger, McGee says its reasonable to believe Mitel will not be doing any major acquisitions in the next coming years. He says Mitel does not have the ability to raise its debt levels in the coming years, a fact displayed in Mitel’s November analyst presentation. In that document, Mitel highlights its maximum allowed level of debt and its projected debt levels. After comparing the two, there is not much room left for a major purchase.

Yet, regardless of these debt levels, Pereira still states anything is possible in the next few years for Mitel.

“Acquisitions are a part of any strong company,” says Pereira. “As of now, we are actively looking to grow.”