It was a strange kind of quarter for Mitel, the telecommunications software company chaired by Terence Matthews. The Kanata firm on Thursday reported third-quarter revenues of $241.5 million, up three per cent year over year. (All figures U.S.)
It also recorded a net loss of $26.8 million compared to profit of $25.1 million during the same period a year ago.
But the summary data told you very little about what’s really going on.
Mitel is undergoing an epic upheaval in markets, technology and corporate structure. Its industry, which involves the sale of telephone systems, is shifting rapidly from hardware to software-based technologies. In order to create a firm with the necessary heft to compete in this emerging market, Rich McBee — Mitel’s CEO since early 2011 — has acquired a series of rivals. Most recently it paid $430 million in late September to snap up California-based ShoreTel.
The net result has been the creation of a global enterprise with nearly 4,000 employees (including 550 in Kanata) and major operations throughout North America and Europe. With the purchase of ShoreTel, Mitel’s annual revenues are expected to jump to $1.3 billion from an estimated $1.05 billion in 2017.
Even that underestimates the activity taking place under the company’s hood. Mitel used to make most of its revenue selling telephone systems hardware, for which customers would pay upfront. Many of the latter are now paying for their telephone services a bit at a time through software-as-a-service. This is delivered through networks of computers known as the cloud. The net effect is to push some of the revenues Mitel would have earned through hardware sales into the future, thus depressing current revenues. But as the ratio of software sales increases — these now represent roughly one-third of revenues — the financial picture should improve.
That, at least, is Rich McBee and Mitel’s strategy.
Now, back to the third quarter. The overall increase in revenues of just three per cent reflected a significant jump in cloud-based technology combined with a small decline in hardware sales. Further complicating things, the results also included five days’ worth of business from ShoreTel.
The earnings snapshot was even messier. The third quarter net loss included one-time restructuring costs of $35.7 million. And this compared to the previous year’s third quarter, which generated a strong profit on the strength of a $60-million termination fee Mitel earned because one of its earlier acquisition attempts fell through. Nothing to do with operations, in other words.
To help provide insight into the underlying business, Mitel stripped out the unusual items. This produced a $20.2-million third-quarter net profit compared to $15 million a year earlier. With Mitel still on the prowl for fresh acquisitions, don’t expect the company’s numbers to simplify anytime soon.
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