This report was adapted by Cantech Letter from a piece prepared by Sophic Capital. For the original report, and more in-depth research, please visit Sophic Capital’s website, here.
ABSTRACT: In our first enterprise phone report, Off The Hook with Smart Desk Phones, we explained why we believe that desktop phones should evolve into smartphones loaded with productivity tools for office workers. We decided to delve deeper into this underappreciated market to uncover what front-line NEC America resellers think about the UT880 phone, an Android, VoIP, smart desktop phone created by Sophic Capital client Apivio Systems. What we found is that the NEC/Apivio relationship is solid, the UT880 features prominently within NEC’s unified communications and IT platforms, and that NEC resellers like the phone.
Reasons to Read this Report
- Obtain a basic overview of enterprise telephony;
- Find out the market potential for some enterprise telephony technologies;
- Learn how Sophic Capital client Apivio Systems is revolutionizing enterprise telephony;
- Read how Apivio Systems will monetize its products via its partnership with NEC America, a subsidiary of the world’s third largest unified communications provider;
- Discover what NEC resellers think about the Apivio/NEC offering; and,
- See what apps Apivio has developed and what apps we think will drive Apivio phone adoption.
Introduction
Enterprise telephony is big business. Besides all those complicated switches, routers, and cloud services, one thing that hasn’t evolved over time is the desktop phone. They’re dumb and unproductive. However, Apivio Systems (APV:TSXV), a Sophic Capital client, is changing that by introducing Android-based, Voice over Internet Protocol (VoIP), smart desktop phones for the enterprise. Apivio is doing this via a partnership with NEC Corporation of America (NEC), a subsidiary of the world’s third largest enterprise telephony provider. From June 18 through June 20, we attended NEC Advantage, a conference for NEC solutions resellers, and Apivio’s UT880 was prominent in several keynote speeches and in the exposition hall. We had a chance to see UT880 demonstrations and ask the front-line salespeople what they thought about the phone. Read on to find out what they told us.
What is VoIP?
In terms of telephony, VoIP is a way of converting someone’s voice into a digital signal, which is transported over a network and reconverted back into analog at the receiver. Skype, the popular consumer internet communications software, makes use of VoIP – converting analog voice into digital packets and using the Internet to transport the information. Most desktop phones use VoIP too. In an enterprise, a private branch exchange (PBX) is used to connect phones via the enterprise’s internet network, as well as provide connections to the Internet for external calls.
VoIP as Part of Unified Communications
Unified communications (UC) is the equipment, software, systems, and services that facilitate enterprise communications. It is the integration of real-time enterprise communications services that include: VoIP, messaging, chat, web, audio, mobility, and video. The ultimate UC objective is to increase employee productivity by optimizing business processes, and communication plays a major role in achieving this objective. Although UC provides a broader portfolio of communication services, an enterprise can survive on VoIP alone. However, a VoIP-only strategy inhibits employees from accessing information and services across their portfolio of devices.
To Cloud or Not to Cloud? It Doesn’t Matter for Enterprise Phone Hardware
Industry debate has ensued regarding on premise (in-house servers and management/administrative network functions) versus cloud-based solutions for unified communications. Cloud solutions require minimal capital and new communication features are easily added alongside existing communication systems. Licensing is usually per cloud seat whereas on premise solutions sometimes have ongoing maintenance costs to support features. However, cloud solutions are dependent upon the reliability of the enterprise’s Internet connection, although connectivity redundancy is often offered. The primary benefit from the on premise strategy is believed to be control over systems and data (data security is a big issue within enterprises). At NEC Advantage, we learned that NEC is moving towards offering hosted cloud solutions. Regardless of whether an enterprise selects an on premise or a cloud-hosted solution, it will still need telephones.
We anticipate that UC will become commoditized. Moving UC to the cloud can benefit enterprise telephony providers, in that it builds their portfolios of high-margin, recurring revenue services. Cloud UC offers enterprise one-stop shopping, service, and support. And once basic services like voice, messaging, and video move to the cloud, enterprise telephony providers can build productivity apps around these services that will further reduce their clients’ costs, even after factoring in licensing revenues. Whether or not the commoditization of UC happens, enterprise workers will always need an interface via desktop, tablet, phone, or some combination of access devices.
Market Outlook
Unified Communications
Credence Research forecasts that the global unified communication market was valued at US$31.76 billion in 2014 and could exceed US$106.44 billion by 2022. Transparency Market Research pegs a US$61.9 billion market opportunity by 2018, increasing from US$22.8 billion in 2011. Global Market Insights estimated the 2015 unified communications market at $34.8 billion. The firm forecasts the market to grow to $95 billion by 2023.
Enterprise Telephony
In terms of volume, Frost & Sullivan saw the number of IP desktop phones grow 5.8% in 2015 to 21 million. During a Frost & Sullivan presentation at the 2016 NEC Advantage conference, the analyst stated that the research firm anticipates the number of desktop phones sold over time will decline. However, he added that that the desktop phone is not dying. In fact, they are becoming more powerful, adding higher value to enterprises at lower costs.
Apivio’s Phones Will Revolutionize Enterprise Productivity
Apivio Systems (APV:TSXV), a Sophic Capital client, develops telephones and applications for the enterprise and consumer VoIP markets. Apivio has sold over 5 million handsets, mostly in Asia. Although Apivio’s Korean subsidiary generated revenue of almost C$60 million in 2015 and C$5.5 million in adjusted EBITDA1, Apvio’s stock trades at about 0.2x EV/2015 Revenues of the Korean subsidiary alone.
1 Consolidated adjusted EBITDA was $2.1 million in 2015.
Enterprise Desktop Telephones – Re-invented by Apivio Systems
A fundamental flaw of enterprise telephones is that they are “dumb” and unproductive. Dialing a call and answering an inbound call are easy – but who hasn’t struggled while figuring out how to transfer a call, fumbling to look up a co-worker’s numbered extension (assuming a look up list exists)? We’ve been both the instigator and the victim of the hold function – placing someone on hold and hanging up instead.
Legacy phones occupy valuable desktop real estate, yet they don’t do much. Their screens aren’t very useful beyond displaying a telephone number. There has to be better ways to make use of those screens – much like the smartphones that we can’t live without.
Apivio Systems has a vision to make enterprise desktop phones “smart”. Cash from Apivio’s Korean business was used to develop a family of Android-based, VoIP smartphones called Monet. The Monet-series of smart desktop phones represent a shift in enterprise telephony in that they can be loaded with productivity apps and custom interfaces, representing a fundamental shift in how enterprise telephones can be used. As an example, these phones could be used by hotels to stream restaurant and tour advertisements, creating a guest-driven experience that generates new revenues for the hotel. Hospitals can reduce costs by lending discharged patients a Monet phone so that regular conference calls can be held with the patient to assess his or her recovery, rather than having the patient return to the hospital for a costly visit.
It’s these types of scenarios that brought Apivio’s Monet-series smart desktop phones to the attention of NEC Corporation of America. a subsidiary of NEC – the world’s third largest unified communications provider.
Who is NEC?
Formed in 1899 as Nippon Electric Company and renamed NEC in 1983, NEC is a leading global information and communications technology (ICT) company. In 2015, the company was the world’s third largest PBX and unified communications provider (Exhibit 1). As Exhibit 2 shows, NEC’s enterprise business generates $2.25 billion.
A recurring theme at NEC Advantage was the need to merge UC with information technology (IT). One keynote speaker characterized UC as an “app” that can make IT service and hardware sales. This hints at the commoditization of UC, albeit a commodity that generates recurring revenues.
Exhibit 1 2015 Global PBX and Unified Communications Revenue Share2
NEC America Sees Apivio’s Monet as an Opportunity
In December 2014, NEC America ordered 2,000 of Apivio’s white-labeled, Monet-Series phones as the UT880 (Exhibit 3). This order was followed by a 6,000-unit order from NEC America in February 2015. In the same month, a European customer ordered 2,000 units as well. Apivio delivered all 10,000 phones on schedule.
At the end of March 2016, NEC America placed a follow on order for another 2,000 Monet phones. This followed NEC America’s successful integration into three of the NEC Univerge private branch exchanges, or PBXs. The largest of these PBXs can accommodate almost 200,000 users and illustrates the size of potential future enterprise orders.
Order flow and integration of the Monet-series from NEC America continues to progress. As we discovered at NEC Advantage, orders could expand beyond NEC America to other NEC geographies. However, the greater opportunity could be the enterprise applications that will run on these smart desktop phones. These enterprise applications are not the typical $1 apps used on consumer smartphones but rather will generate high recurring revenue with software-like gross margins.
UT880 Seen Everywhere at NEC Advantage
The UT880 was prominent in NEC Advantage keynotes, breakout sessions, and the exposition (below). The phone’s integrated handset and microphone allow for voice; the camera for video and surveillance; and the large screen to host productivity apps or act as a second desktop screen (i.e. stream a video call on the UT880 while reviewing a PowerPoint presentation on the desktop). Several executives assured NEC resellers that the company was developing apps (something resellers are asking for), and NEC highlighted key apps that NEC resellers demanded at last year’s NEC Advantage conference (more on those later).
So it seems that NEC has established that Apivio’s Monet-series phones are a crucial device for its enterprise telephony portfolio. Why?
NEC America Positioning itself for Smart Enterprises
During the conference’s keynote presentation, several NEC executives elaborated about how the company was positioning itself to provide smart enterprise solutions. In fact, the conference’s theme was “Discover the Power of the Smart Enterprise.” Smart enterprises are firms that leverage communications systems, services, and technology solutions that drive workforce engagement and create a competitive edge.
NEC sees success for its resellers via the transition to services-based recurring revenues in smart enterprises. During a session about the convergence of UC and IT, an NEC America executive emphasized that NEC is committed to helping dealers make money, and a key driver to achieve that goal is to transition from selling hardware to services that generate recurring revenues. In the old revenue model, hardware was typically a one-time sale, then the dealer would move onto the next enterprise to look for other opportunities to make more one-time sales. With services, dealers can leverage the existing installed hardware base to sell productivity tools that generate recurring revenues with higher margins.
Install the Phones, and You’ll have a Platform for Apps
UT880 applications are the key driver to help resellers generate recurring revenues. The NEC executive continued the theme by highlighting the UT880’s strategy as a tool to build recurring revenues across several Smart Enterprise verticals. In the presentation slide to the right, he detailed the examples of applications being developed for the hospitality, video surveillance, and biometric verticals. He also reassured NEC resellers that more apps were on the way.
During another keynote, an NEC executive called out the UT880 as a 2015 initiative gaining traction (right). He stated that after last year’s NEC Advantage conference, dealers were asked to provide feedback about the UT880 apps that their sales prospects wanted. The number one UT880 app request was facial recognition for security.
Fast forward to 2016, and NEC America has delivered. At the conference exposition, we got to see the UT880 facial recognition security app. Dealers crowded around the booth, and after their demos, we solicited their feedback.
On the bottom right is the facial recognition application demanded by reseller clients as indicated in a 2015 survey. The UT880 camera scanned faces and easily integrated them into a database of authorized users. Although several resellers crammed this booth for a demo, we managed to squeeze in a few questions of our own.
Another question that we asked was directed toward the resellers:What did they think about the app? Resellers liked the app and the technology, including one who sold exclusively into the U.S. Department of Defense. The facial recognition app was what resellers wanted, and NEC delivered and impressed.
Another app on display (bottom right) was a UT880 security solution. The UT880 issued an alert due to a security breach generated by an IP camera. For cameras with the ability to pivot, a security officer could control the camera via the UT880, and use it to sweep an area and zoom into areas of interest.
NEC Resellers Like the UT880
NEC resellers were enthusiastic about the UT880. We saw 8 exposition booths that had UT880s – mostly as a demonstration device for NEC solutions. Resellers liked the UT880, and several told us that they had them in their office (great salesmen will use the product they sell). More importantly, resellers told us their clients reacted favourably to the UT880. One concern was pricing: Many resellers got pushback from clients when they compared the UT880’s price to other IP phones. Other resellers, including a reseller who sold to SMBs told us that pricing wasn’t an issue at all.
Several NEC resellers shared which verticals would be first to adopt the UT880. The quick answer – all of them. One vertical likely won’t dominate adoption. Instead, adoption will likely be spread across several verticals including: hospitality, healthcare, education, and government. Several of the resellers we spoke with sold into the hospitality vertical. Hotels see the UT880’s value to generate revenue, reduce cost, and improve guest experiences. When we asked what the biggest concern was selling into the hospitality vertical, resellers told us that the issues were minor – some hotels prefer white instead of black phones. If colour is the biggest issue, then we think the product is a winner.
Apivio’s Stake in UT880 Apps
NEC America recognizes the revenue generating potential from enterprise applications. It’s something that fits in with its strategy of helping resellers generate recurring sales. In December 2015, NEC America launched the App Store, and for every app installed on a Monet-series phone, NEC will share the revenue with Apivio. The platform is also open to third-party developers, and Apivio could earn perhaps a low double digit percentage of the revenues from every third-party application installed on a Monet as well.
Apivio also recognizes the value of enterprise applications. Currently, Apivio is an IP-telephony hardware company. However, it has a strategy to transition to become an enterprise smart desktop phone app company. With an installed base of UT880s, Apivio has the potential to generate high margin recurring revenues, adding even more cash flow to its EBITDA positive Korean subsidiary.
Desktop phones will be around for a long-time to come, and Frost & Sullivan anticipates that these phones will become more productive for workers. As long as Apivio can work with a vendor to integrate the Monet into third-party networking gear (something Apivio has successfully done with NEC PBXs), then the company has the potential to generate hardware and recurring revenues well beyond the C$60 million it reported in 2015.
Hospitality Industry Could be a Winning Vertical for Apivio
The hospitality vertical was a reoccurring theme at NEC Advantage. Several presentations highlighted a transition occurring in this space to hosted services. In one presentation, an NEC reseller asked when phones would disappear from the rooms – a question that a NEC executive said he is asked all the time. The NEC executive responded that phones would disappear from hotel rooms when hotel lawyers would sign off on the liability for 911 emergency events. By law, he added, hotel rooms need a phone, and NEC is positioning itself to address not only the law but also hotel needs: Products that reduce costs, products that increase revenues, and products that make for a better guest experience.
Hotels better have a backup plan for those old phones. The NEC executive, who spends his time traveling around the world meeting hotel management teams, stated that he often comes across legacy phones still used by hotels. At one luxurious San Francisco hotel, he noticed that the rooms had Nortel phones that were almost two decades old. When he asked management why they hadn’t upgraded the phones, they told him that the phones worked well. The NEC executive shared that they, and several other hotels he’s visited, should have back-up plans because one day, these phones won’t be supported, or replacement parts won’t be available any more. And if a hotel phone fails during a 911 emergency, hotels with legacy phones could face a large legal liability.
Hotels recognize opportunities, but can sometimes lack execution. An NEC executive shared the time he stayed at a luxurious Hawaiian resort. No details were spared around the pristine grounds and the opulent rooms. And when he entered his suite, he was pleasantly surprised to see a tablet that drove the customer experience. So he picked up the tablet and hit an icon for room service. What popped up on the tablet’s screen was a message prompting him to pick up the room phone and hit “*555”. When he went to book the spa for his wife, tablet returned instructions on what number to dial on the phone and whom to speak with. The tablet was supposed to make things easier for the guest but clearly failed.
Apivio demonstrated a hotel app at the NEC Advantage conference. An Apivio employee showed us how the UT880’s user interface interacted with the administrative back-end. He showed how the phone’s 911 soft button worked and how the administrator could push buttons to the phone that indicated “I am okay” and “I need help” for the room guest to interact. If there was no response, the administrator could use the UT880’s microphone and camera to hear and see what was going on. This is a feature that meets hospitality industry needs to maximize guest safety. The Apivio employee also showed us how hotels could populate the UT880 with advertisements for local restaurants and businesses, thus presenting revenue generating opportunities for hotels. Guests could also use common apps like Facebook, Skype, and others to help drive their experiences rather than calling the front desk, thus lowering costs for hotels. Increased safety; higher revenues; lower costs: Apivio’s UT880 meets the hospitality industry’s needs.
Horizontal Market Apps Could Be Winners for Apivio
We believe that Apivio has opportunities to create horizontal apps that every vertical will need. One such app is diagnosing the connection between a UT880 and the network. When someone’s enterprise phone has problems, such as echo or no connection, users typically contact the help department. The network administrator then runs through a checklist of potential issues, some of which she can do by herself, and some which require the help of the employee reporting the phone’s problem. Employees aren’t often able to help since they aren’t always technical savvy. Under this situation, a technician is deployed to help solve the problem. Often, the technician is sent to fix the problem anyway.
This traditional process of debugging IP phone issues is fraught with problems. First, the person reporting the problem may not have the technical expertise to assist the network administrator as she runs through the checklist of potential solutions. Second, the entire debugging process is time consuming, resulting in increased expenses for the network administrator, the employee’s downtime, and the technician deployed to resolve the issue. Third, the process is reactive instead of proactive. Finally, the solution to fix the phone’s issues may not be permanent – another issue could arise as soon as the next piece of hardware is connected to the network.
Apivio has the potential to create a seamless, proactive, diagnostic and repair tool that fixes UT880 connectivity problems. This could be a cloud service, recurring revenue opportunity that monitors and fixes connectivity issues. We believe that this would be a killer app for network administrators because they would deal with fewer UT880 issues. We emphasize “UT880” because it doesn’t make sense to for Apivio to monitor and fix competitive phones. Let competitive phone OEMs develop their own diagnostic and repair apps to help network administrators.
Wi-Fi Phones in Apivio’s Pipeline
There are a lot of enterprises where it makes sense for workers to carry their desktop phones. In distributed enterprises such as warehouses, stadiums, hospitals, or airports, many employees spend the day walking from place to place. Typically, when we call these people, they’re away from their desks or offices, forcing us to leave voicemail which may not be returned on a timely basis. Enterprises could significantly reduce this problem by allowing employees to carry their desktop phone with them. Of course, we’re not talking about having them drag around bulky pieces of plastic tethered to walls via miles of Cat5 cable; we’re talking about enterprises leveraging their Wi-Fi networks to make employees accessible.
One option consumers and enterprises are investigating to reduce/eliminate charges is Wi-Fi calling. Wi-Fi calling allows users to use Wi-Fi for voice communications. Some advantages include: better coverage over cellular networks for indoor calls; calls are often free, and; Wi-Fi calling is available on several handsets already. Some disadvantages include: voice quality can be bad; users must hunt for a Wi-Fi signal, and; carriers are resisting the trend (although several are exploring the option as part of calling packages).
Apivio’s Liberty phones are mobile Wi-Fi phones targeted at both enterprises and consumers. As long as Wi-Fi is available, Liberty gives freedom to roam anywhere in the world without getting those nasty surprise telecom bills. Apivio has sold over 100,000 Wi-Fi phones into the South Korean market.
Conclusion
We attended NEC Advantage to determine the strength of Apivio’s relationship with NEC. It’s strong. Apivio’s UT880 was featured in several presentations, demonstrated at several booths in the exposition hall, and was known by all the resellers whom we spoke with. More apps are in development which should drive UT880 adoption, and we think that the hospitality industry will be a large vertical since all hotels must have a phone in each room by law (due to 911 concerns).
Apivio’s stock is inexpensive (0.2x EV/2015 Revenues of the Korean subsidiary alone). The NEC opportunity represents a call option on an inexpensive stock that did almost $60 million in revenues and $5.5 million in adjusted EBITDA in Korea during 2015 (consolidated adjusted EBITDA was $2.1 million). On top of the UT880 hardware story, investors receive a second call option on Apivio’s recurring revenues for apps installed on the UT880. But wait! There’s more! Apivio also has a third, long-term, option on a Wi-Fi phone, which should appeal to distributed enterprises such as warehouses and delivery people, hopefully in a few years. An inexpensive stock with three, call options for upside should make a compelling investment thesis for investors.
Acronyms Used in this Report
ICT information and communications technology
IT information technology
OEM original equipment manufacturer
PBX private branch exchange
UC unified communications
VoIP Voice over Internet Protocol
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