SHOR

ShoreTel, Inc. (SHOR)

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ShoreTel, Inc. (SHOR)

F3Q 2011 Earnings Call

April 26, 2011 5:30 p.m. ET

Executives

Tonya Chin – Director, Investor Relations

Peter Blackmore – President and CEO

Mike Healy – Senior Vice President and CFO

Kevin Gavin – Chief Marketing Officer

Analysts

Troy Jensen – Piper Jaffray

Edward Parker – Lazard Capital Markets

Sanjiv Wadhwani – Stifel Nicolaus

Gregory Burns – Sidoti & Company

Rohit Chopra – Wedbush Securities

Lynn Um – Barclays Capital

Steve O’Brien – JPMorgan

Douglas Ireland – JMP Securities

Ian – Northland Capital Markets

Rohit Chopra – Wedbush Securities

Presentation

Operator

Thanks so much for holding everyone, and welcome to the ShoreTel System third quarter 2011 earnings conference call. Just a quick reminder; today’s call is being recorded.

And now, at this time for opening remarks and introductions, I’d like to turn the call over Ms. Tonya Chin, Director of Investor Relations. Ms. Chin, please go ahead.

Tonya Chin

Hello and thanks for joining us today as we report our third quarter fiscal year 2011 financial results. Joining me on the call today are Peter Blackmore, ShoreTel’s President and CEO; Mike Healy, Senior Vice President and Chief Financial Officer. Additionally, we have our Chief Marketing officer Kevin Gavin, who will be participating in the Q&A session.

Before I begin, I’ll remind you that during today’s call, management will make forward-looking statements within the meaning of the Safe Harbor Provision of Federal Securities laws regarding the company’s anticipated future revenues, gross margins, operating expenses and other financial and business-related information. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Additional information concerning the risk factors that could cause actual results to differ materially from those in our forward-looking statements can be found in the company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010, our most recent 10-Q for the quarter-ended September 31, 2010 and the current report on Form 8-K furnished today.

The information in this conference call related to projections or other forward-looking statements is based on management’s current expectations. The company does not intend to update its forward-looking statements should circumstances change. As a matter of policy, ShoreTel does not comment on financial guidance during the quarter unless it’s done in a public forum.

We will be discussing both GAAP and non-GAAP results throughout this call, and I ask that you refer to our press release issued today for the reconciliation between these amounts. Our non-GAAP numbers exclude stock-based compensation charges, amortization of acquisition-related intangibles, other adjustments as well as the related tax impact.

Now, I’m very pleased to turn the call over to Peter Blackmore. Peter?

Peter Blackmore

Thank you Tonya. Hello everybody and thank you for joining the call. It is my pleasure to report the financial highlights for our third quarter during which ShoreTel generated year-over-year growth about 30% for the fourth consecutive quarter.

We delivered record revenues of 51.6 million in the quarter, up 8% sequentially over the previous quarter and up 39% of the third quarter of fiscal 2010.

We reported a strong improvement in non-GAAP gross margins, which at 68.6% represent another record. And we are very pleased to reach an important milestone to show non-GAAP profit one quarter earlier than expected with non-GAAP net income of $602,000.

Four months into my tenure at ShoreTel, I am even more energized about the future prospects of the company than I was when I first joined. The growth opportunity here is significant, and I’m even more convinced of that today.

ShoreTel has a winning product based on the principal of simplicity. It offers a unique and superior architecture, the lowest total cost of ownership and the highest customer satisfaction.

The changes that we are making to expand our distribution both in the United States and internationally, and to improve our brand awareness, provide a significant opportunity to further grow ShoreTel’s market share for the coming quarters.

In fact, we took another great step in that direction in the December 2010 quarter as the investment we made in our sales and marketing engine of the past several quarters clearly paid dividends, but in terms of ShoreTel’s accelerated revenue growth and market share.

According to synergy research based on revenue, ShoreTel increased its United States enterprise IP market share to 6% from 5.5% in the September quarter. In the United States pure IP market, which excludes hybrid systems, ShoreTel’s share also grew nicely to 8.4% from 8% in the September quarter. Our worldwide market share also improved sequentially .

I’d like to point out that we delivered this growth in December quarter despite a 4% sequential decline in the overall U.S. enterprise IP telephony market.

International revenues represented 12% of total revenues in the third quarter and were up 6% sequentially from quarter two. We are making solid progress in Europe. Our revenues were up strongly quarter over quarter and were up 66% year over year. Revenues from our contact center business in the U.K. doubled quarter over quarter, demonstrating growing traction for that area of our business.

Additionally and importantly, we’re thrilled to be selected by Vodafone to be their preferred provider in the 100 to 500-seat market in the U.K. We were awarded the status after competing for it against all of our main competitors. And we are pleased that ShoreTel’s unique value proposition was acknowledged by Vodafone with this new relationship. We expect this new partnership to yield significant revenue growth to our U.K. business over the coming quarters.

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