Mitel Networks Corp. (MITL, Financial) is up 28% since I last covered the stock. At the time, Mitel was a value play due to the divesture of its unprofitable mobile business, positive growth outlook for the unified communication as a service (UCaaS) market, its strong position in the unified communication and collaboration (UCC) market and reasonable valuation.
As the stock is up more than a quarter of the price since then, the assumption of reasonable valuation should be revisited to ascertain if it’s still worth holding on to the stock. Moreover, concerns arose recently in regard to Mitel converting its on-premise communication business as customers move toward cloud computing.
Regardless, the company remains a value proposition as the cloud transition is well under way. Industry analysts still consider Mitel to be a major player in the UCC and UCaaS markets. Moreover, earnings consensus has moved upward, leaving the company in a value territory.
Transition to cloud is up and running
Cloud deployment of unified communication services is set for growth going forward. Mitel did quite well in 2017 as it grew its cloud revenue by double-digits during the first quarter of the year. Note, the transition to cloud is the key to capturing future growth in the unified communications market. For full fiscal 2017, Mitel posted decent results on the cloud front.
Mitel’s annual SEC filing 2017.
The company managed to post $175 million in recurring cloud revenue, up 52% year over year. Mitel also reached 1 million cloud subscribers by the end of the third quarter. Cloud revenue now makes up 16.6% of the company’s total revenue, and continues to grow. Moreover, Synergy Research notes Mitel is the second-largest UCaaS vendor worldwide.
Source: Presentation, Investors’ Day 2018
Mitel's strong foothold in unified communication as a service points toward a differentiated cloud product portfolio. A strong cloud portfolio can help the company gain material market share in cloud-based communication and collaboration.
Mitel’s annual SEC filing 2017.
Although revenue in the enterprise segment has declined over the last couple years, the decline was offset by higher growth in cloud revenue. Cloud revenue share increased from 9% to 16% over the last two years, a compound annual growth rate of 30%. Overall, there seems to be no material problem for Mitel in shifting from enterprise to cloud unified solutions.
The decline in enterprise revenue isn’t materializing yet
Although most of the unified communication growth is expected to come from cloud deployments, the fears Mitel will lose enterprise revenue are slightly overblown. Despite investors’ skepticism, the company managed to sustain its enterprise revenue at a similar level, up approximately 2% year over year.
Not all enterprise customers favor cloud deployments, however, due to the challenges of data protection. On-premise solutions are still favored by large corporations. This is evident from Mitel’s 2017 results. Enterprise revenue slightly increased during the year, as shown in the graph above. Note Mitel’s enterprise communication products target customers that prefer private, or on-site, deployment of communication solutions.
In addition, the unified communications market is expected to hit $57 billion by 2024, according to Global Markets Insights Inc. The research firm also noted telephony platforms (a major product of Mitel) are expected to hold significant market share of over 25% by 2024, owing to large-scale deployment of telephony applications across enterprises.
Industry analysts continue to take a positive view of Mitel’s offerings
Frost&Sullivan, an authoritative UCC research firm, says the following about Mitel:
"Mitel has successfully leveraged acquisitions to add to its technology, partner ecosystem, and customer assets, which has given the company greater control over innovation in the important customer interaction market, created more of an end-to-end portfolio, and enabled it to compete more successfully both within and outside of its existing UCC accounts."
Moreover, Mitel continues to be named a leader in Gartner’s Magic Quadrant for unified communications. Recently, IDC also added Mitel to its list of leaders, which includes Microsoft Corp. (MSFT, Financial) and Cisco Systems Inc. (CSCO, Financial), in its worldwide unified communications and collaboration Vendor Assessment of 2017. Previously, IDC classified Mitel as a major player in the UCC space.
Source, IDC 2015 (left) and 2017 (right)
According to IDC MarktScape, Mitel’s offerings have improved since 2015.Â
Price is still lagging behind valuation.
GuruFocus' fair value discount cash flow calculator projects a price target of $9.46, as noted in my prior analysis. However, much has changed since then. Earnings expectations have gone up. The earnings per share estimate for 2018 has increased from 81 cents to 96 cents for 2018 – revised consensus for 2019 now stands at $1.13.
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The revised valuation based on new earnings consensus reveals a price of $11.5 for Mitel, an upside of 19% over the current stock price.
Bottom line
While Mitel is trading around its 52-week high, there’s still some juice left in the stock amid improved earnings estimates, decent cloud growth and a dominating position in the UCC and UCaaS markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
