Mitel faces ‘challenging’ fight on IPO anniversary

Published in the Ottawa Business Journal newspaper and website.
May 2, 2011 (May 6 on

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Year since public debut fraught with stock price drops, but some upside remains

In the 12 months since Mitel Networks’s initial public offering on the Nasdaq, there’s no denying the company’s stock has had a rough ride.

From its inauspicious opening on April 22, 2010 at $12.75 – which was down $1.25 from its announced price of $14 and significantly less than an earlier stated goal of $18 to $20 – to its nadir of $4.01 in late March of this year, the telecom systems maker’s first anniversary as a public company marks the end of a year characterized by downward movement and analyst concern.

(Click here to view a one-year timeline and stock chart for Mitel.)

While Mitel was unable to provide comment as it’s in a quiet period, observers note much of the problem centres on the first impressions Mitel has been making on investors who don’t know its nearly four-decade-long history.

“The first thing to keep in mind is that Mitel’s just become a public company within the last three quarters … From an investor perspective, it’s an unknown entity that didn’t have the benefit of an established, long relationship and reputation with institutional investors,” said JMP Securities analyst Douglas Ireland, who has a “market outperform” rating and a $17 price target on Mitel’s stock. He noted his company was one of the institutions that worked on Mitel’s IPO.

Mr. Ireland pointed to the fact that Mitel stumbled right out of the gate, missing its own guidance in its very first public quarter, as well as consensus expectations for future earnings in subsequent periods.

In addition, while the retirement of Don Smith as Mitel CEO and subsequent succession by Richard McBee had likely been in the works for some time, the announcement so soon after the IPO made for unfortunate timing.

“It looked like a company in transition,” said Mr. Ireland.

He noted he doesn’t think Mitel is going away anytime soon, given its size, third-place market share in global voice-over-Internet protocol systems, and $648 million in sales in fiscal 2010.

Rather, Mr. Ireland said, it’s a matter of execution and sales and marketing. “Mitel’s products are very solid, mature products with good software content, and they’ve aligned themselves with important industry trends like virtualization … so they’re doing a lot of the right things.

“It’s the sales and marketing piece where they have perhaps been out-executed by some of their competitors.”

However, it’s still an important issue that has led some other analysts to issue far less rosy target prices and ratings. Steven O’Brien, an analyst with J.P. Morgan with a neutral rating on Mitel’s stock, wrote in a research note that the company “faces stiff competition from larger competitors such as Avaya, Cisco and Microsoft for enterprise voice customers, reducing the potential for significant share gains.”

In the report, which was put out following Mitel’s third-quarter earnings release, Mr. O’Brien noted that while the period’s results were above J.P. Morgan’s forecasts, Mitel’s fourth-quarter guidance of $160 million to $165 million in sales was “substantially” lower than expected, and indicated a ninth straight quarter of flat revenue.

The weak guidance contributed to the analyst lowering his price target to $6.50 from $7.

“We are concerned that Mitel’s virtualized call control, UCC (unified communications and collaboration) application and 5000-product family refresh may not be securing the traction we anticipated – at least in the near term.”

Still, there’s possible upside as long as Mitel manages expectations appropriately. Mr. Ireland pointed to the example of Mitel competitor ShoreTel, which also missed its guidance shortly after its 2007 IPO and saw its share price plunging from more than $18 to less than $4. It has since recovered and now is worth more than $10.

“It proves that with consistent execution, the value does return … Investors will be really interested after two consistent quarters of meeting and beating expectations,” said Mr. Ireland, adding stakeholders will be watching closely for the third quarter after Mitel’s earnings miss since they will then also be able to evaluate the new CEO’s first 100 days in office.

As well, the company stands to benefit from the stabilization of the Internet protocol enterprise voice market in 2010 and the five-per-cent annual growth the industry is expected to experience through 2012, if it’s able to gain market share, wrote J.P. Morgan’s Mr. O’Brien.

Whether Mitel rises or falls, the journey will be worth watching, as much of the startup culture in Ottawa has ties to Mitel due to its relationship with tech titan Terry Matthews and his investment company Wesley Clover, said OCRI chief executive Claude Haw.

“With companies such as Benbria and Magor, the general Wesley Clover model has been to have a big brother of some sort, and that’s often Mitel, since big companies tend to want larger companies to handle the risk from smaller startups,” said Mr. Haw, who worked with Mitel in the 1980s.

But given the firm’s long history of reinvention, from its roots as a purveyor of phone hardware to its current focus on both systems and software, there could still be tricks up Mitel’s sleeve.

Added Mr. Haw: “From its founding, it’s coming up on 40 years, which is a long time. Not so many companies make it that long, so it’s a credit to the innovation of the team.”

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