SHOR

ShoreTel, Inc. (SHOR)

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ShoreTel, Inc. (SHOR)

Analyst Day Conference Call

March 14, 2012 04:00 pm ET

Executives

Tonya Chin - Director, IR

Peter Blackmore - CEO

Kevin Gavin - CMO

Dan Hoffman - CEO, M5

Pej Roshan - VP Mobility

Don Joos - VP, Global Services

Bill Schlough - CIO, San Francisco Giants

Matt Deringo - VP Business Systems, Brown and Caldwell

Martin Perry - VP Technology Ranstadt Professionals

Scott Chambers - COO Pacific Business Centers

Mike Healy - SVP & CFO

Rick Parkinson - CIO

Analysts

Lynn Um - Barclays Capital

Sanjiv Wadhwani - Stifel Nicolaus

Steve O’Brien - JPMorgan

Jon Arnold - J Arnold & Associates

Ken Landoline - Current Analysis

Greg Burns - Sidoti and Co.

Presentation

Tonya Chin

Hi everybody and welcome, we really appreciate you making the trip out in the rain. For those of you that I don't know I am Tonya Chin, Director of Investor Relations here at ShoreTel. Just have a few announcement and we'll get started. First if you're looking for restrooms, they are at the back and the front of this long corridor. Today we are doing two Q&A sessions. So the first Q&A session is meant for the first three speakers if you could and the second longer session will be for the rest of the content and of course anything else that you would like to talk about.

You have a survey on your desk, so please fill it out and help us do a better job next year and we will of course we are always trying to improve it and as a thank you we have a gift on your way out. So please go ahead and turn that in. And then lastly I do need to remind you that we will be making some forward-looking statements today that are covered by the Safe Harbor provision. Those statements do have risks and we refer you to our SEC documents for a full list of our risk worries factors. And with that I'm excited to bring Peter Blackmore President and CEO of ShoreTel.

Peter Blackmore

A very good afternoon and welcome and thank you for a great turnout on a rainy day. You can tell the English accent and I ordered it specially. Well I know San Francisco needs rain but it shouldn't have been today but nevertheless welcome. We have got a great event and I think you'll be very excited.

Before I begin I wanted to introduce our host, Bill Schlough who is over there and slightly out of camera. Bill is the CIO of the Giants. Go Giants! Also a great customer, a great partner and he will be leading the customer panel later. So many, many thanks Bill.

You see a lot of Mike Healy, myself and obviously Tonya, but I wanted to show off our team, how the work is done by many people in this great company and they are here today. So let me start with the newest member of our team, Dan Hoffman. Dan will be presenting later, obviously the CEO of M5 soon to be the President and General Manager of ShoreTel [X], we will rename M5 as we close and delighted to have you.

Dan has brought three of his lieutenants; Keith Nealon, the head of sales, Eric Raab, the CTO and Jeff Valentine, the head of product development. So you will be able to chat to them at the end of the show. And then Mike Healy, obviously you know Mike Healy. We have next to him, Pej Roshan. Pej was the co-founder along with Tim Olson both of whom are still in the company, Agito. So Pej is the VP of Mobility; Ava Hahn is our General Counsel; Carolyn Gracey who is our Head of HR; and then Mark Arman VP of Business Development and also the Global Value-Added distributors; Rick Parkinson who is our CIO; Pedro Rump leads our Product Development and Don Joos who leads our Global Services; and Kevin Gavin our Chief marketing Officer.

Last but not least we have Don Girskis who is currently our Senior Vice President of Sales and doing a great job. And as you know Don is moving on to pastures new. This is not a surprise to us, it's just the timing was not known until Don made a very personal decision when to start a new chapter in his life.

And many of you who have been like me in business a long while and sometimes you wonder when you’ve finished chasing that Holy Grail, what you do next. Don is very passionate about doing good works and he and his wife are off to Cambodia on April the 14th. So that's a big deal, that's a big deal. So I applaud that, wish him every luck, but just before he goes he’s still got to finish the quarter and finish it strongly.

And by the way before you ask me the obvious question when somebody in sales decides to go to another chapter, the quarter is on track. We always have to do 50% of our business in the first two months till the end of February. We did that, nailed it. We are now down to the last 50% which is all down to execution, the pipeline is there. So I have got every confidence that we will come in within the guidelines we have set, we are on track. So good luck Don.

So the agenda, we put together I will make some, set the scene in terms of what the market is, how we can keep growing. We are very passionate about the continued growth of ShoreTel in the premise market. It's a big deal I will be saying more about that. We are very confident on our roadmap, we understand how to win against the competition and we will explain that in more detail.

So Kevin will talk a little bit more on our roadmap and then obviously the big important news and we close M5 certainly before the end of March. Dan Hoffman is here and we will talk through the whole of the M5 story and why we are so excited to add that to the overall ShoreTel environment.

We then have a Q&A and as Tonya said this is to enable you probably to ask down a lot of questions. We did not want to leave it right to the end, we thought it would also provide a break in the agenda. Then after we come back, after the Q&A, Pej Roshan will take you through Mobility. This is really cool what Pej and the team are doing and we are going to show you demonstrations and capabilities which you have not seen before and then Don Girskis will talk about our other secret sauce which is we have the highest customer satisfaction in the industry and we also measure ourselves on Net Promoter Score which he will explain.

We then have a really cool customer panel and we picked as well as Bill who is a customer and will lead the panel, we picked three very interesting customers. Another large on-premise customer who has just made the decision whether to come to ShoreTel or stay on Microsoft and go to (inaudible). They came to ShoreTel. Another one who is a on-premise solution that provides managed services.

Managed services is a key part of our portfolio, but often the partners do that themselves and this is a very good example of just how you succeed in that business. And then we have an M5 customer, so a pure hosted cloud customer who made the decision to move from Cisco to the cloud. It is a larger -- one-off M5’s larger customers and again I think you'll find a story on how they did it and how they measure it and look at the success, very interesting.

And obviously then we have a longer Q&A after what you really came here to hear about which is the numbers. So Mike Healy is presenting last and we are going to give you the numbers today for financial year 2013 in terms of our model and the following year in terms of model, something the investors at [ShoreTel] were committed to that, more of that later.

So let me now move back to the market. We look at the Unified Communications market in three parts. The telephony part and this slide represents that and then if you expand it, you get the Unified Communications call center. This is the on-premise or managed services market, it's a large market, it is still growing. We are very well positioned in this market and we are passionate about continuing to take share, continuing to grow fast and I will explain why we are so confident in that as I go through the presentation.

But this is our primary business today, will stay a key part of our business and we will win big here. The hosted market is new, it's exciting and growing like a train. We have spent nine months deciding what to do about this important new part of our industry. And we have a lot of experience in technology and every time a cloud or hosted part of the market beginning to become established and start to take off, there is a window of opportunity which if you miss is very hard to ever catch up.

So we started discussing this with our Board in April, we did a lot of analysis, we then had our annual strategy meeting in June of last year and the Board at that time blessed that we needed to get into cloud. You still have a build or buy decision. During the summer, you maybe surprised we talked to 25 cloud voice companies in the United States, not as acquisition targets, but as potential partnerships, how do they make money, what is their secret sauce, what have they discovered about the market, what are the risks and opportunities and we learnt a lot.

From that it became very clear that we should buy, not build. It would have taken us 3 to 5 years to build this capability and it's not just R&D and intellectual property, there is a whole business model change which is very, very different. So we made the decision to buy, we then narrowed it to 9 targets in the September timeframe. Dan and I first met in September, he was attending the salesforce.com conference down in San Francisco and we met for lunch, talked for a long while and then by the November timeframe we narrowed it down to 3 potential targets, of which M5 was actually the strongest and we got involved in very detailed conversations about their model and we also tested M5 with everything we learnt about cloud and hosted businesses.

It's a very different business. You get your obviously revenues and profitability over time. So what you need is very sticky business with your customers, very high customer satisfaction because then it's a very, very profitable business over time. We also wanted a company which had its own intellectual property and we were confident the code could scale. So it was that aspect, high customer satisfaction, high stickiness and then a proven model. We are obviously spending the shareholders money to do this, I wanted to spend it on a company I had confidence in that had a proven model, had clearly it's got scale and was already a leader in this new industry.

And I believe M5 fits all of those capabilities and Dan will do a far better job than I can and talk with you passionately about why he is so excited to join ShoreTel and the confidence we all have in his business going forward.

I want to remind you that although voice is the top of the hierarchy, it’s why we are in the business we are in, we actually sell an important set of solutions to give that full capability. This is where our R&D dollars go in, not just in the switch, not just in the N+1 redundancy capability, but in providing the tools and capabilities to enable this to be a very productive and powerful suite of software.

We are capable of doing mail, not just obviously Microsoft Outlook but with a Mac and Google Mail Systems, a lot of web collaboration tools, very strong instant messaging and presence software, very good collaboration and contact center software and we have high capability video and I will talk more about new things we are doing in video later in the presentation.

The key to this is how much the users really use all this cool stuff, because our feature set is not a million miles away from our larger competitors, but we win because of ease of use. Gone are the days, where you have the luxury of going to the assistants and saying, please can you help me with that, can I do this, explain how I handle this particular aspect.

The modern business person has to be productive and has to have the capability to do all of these things and do it in an intuitive way. Our software is intuitive, it’s very easy to learn it, very easy for people to take full advantage of it and this is the result. You get far more interaction with a ShoreTel system in terms of integration with the desktop, integration with all of the tools behind the Desktop and all the data and capabilities it can bring with anyone else; big proof point.

I do not see that changing anytime soon because we have built our software from the beginning to be differentiated, one set of code, we did not build it by acquisition. So you get complex integration, complex management. It is built right from scratch to achieve just this and that is why customers come to it.

There is also this other aspect, which I think is going to enhance and accelerate growth in unified communications. All of you I am sure are smartphone users, whichever one you have, the iPhone, the Android or the Blackberry. It does matter to us; we have great software for all of those requirements. It is also of matter to us, if for the moment when you use a competitive PBX. We have great software around mobile platform; we work on all of that.

But I would like you to think about the phrase that is on the chart. It is not just about voice. It is about that desktop and desk phone, the integration that you’ve got a desk phone on the go. When I took my iPhone off, because I am making a talk but if I could put it out, I could show you exactly how to use this, exactly how I can access all of the great software as of I was sitting in my desk, find anybody in the company using a four digit internal number. Understand if they are not available and a lot of other assets and is productive outside the office as that can be inside the office.

Happened to be in U.K. a couple of weeks ago and I had couple of board calls, couple of long conference calls. I used this software and I used the Wi-Fi connection in the hotel and I probably saved on those three or four calls a $1000 to the company. Though I got the calls of Wi-Fi effectively free.

So you also have a return on investment for the roaming warrior to enable you to not only have access to all these great tool sets but have that capability. So this I think will accelerate unified communications and give it even more traction and even more capability.

Besides of that we have a lot of loyal and happy customers. And people ask, well what your best vertical? We are very successful in finance, we are very successful in legal, we are very successful in state level government. We are very successful of social media. We are very successful of marvelous sporting franchise, such as the Giants. We have a very, rich, capability in all of these environments.

So let me talk a little bit more about differentiation. Why does this happen? It happens because we have four or five key setting attributes. It is not the function features. We think we are very good at that, but it is the total cost of ownership. You heard us talk about this before. Kevin, after I had spoken will give you more detail about this. We have had our total cost of ownership reviewed by the Aberdeen group just in the last six months.

They have independently reaffirmed the work that we did a couple of years ago that I have talked to you about many times that we have a 15% or more advantage of all of the competitors in this industry. And that is not going to go away anytime soon. We have earned that. Because of the way we designed our code, because of the way we built our systems, people would have to rewrite their code to enable what we do. And that is very compelling.

The next thing is customer satisfaction. Customers do talk to one another, say. I always have their network. CTOs always have their network. For the last eight years what is that measured, the motives for search have put us absolutely the highest customer satisfaction in our industry bar none, consistent every year for the last eight years. We've now moved not only doing customer satisfaction that way to something called Net Promoter Score, which Don Jobs will talk about.

But this is the way Google would have measured customer satisfaction, amazon.com would, Harley-Davidson would. And when you look at the figures that Don presents, I think you will be amazed. We are right at the top of the food chain and that's a hard one and we intend to stay there.

We then have this tag line called Brilliant Simplicity and it captures whatever you are trying to say about TCO and ease of use and customer satisfaction. Interestingly, it’s a tagline that also works superbly in M5, as Dan will explain. It resonates with customers. It differentiates us and enables us to win, more than 50% of the time.

We also have the industry analysts looking very hard at what we do and you’ll also see later on Gartner chart for how they position us and we are unique of standalone and the only one with a strong positive in the small medium business market, which again differentiate us. And customers pay attention to that. Gartner has also just recently evaluated the hosted market and Dan will talk about that. But again they’ve positioned very strongly. One of the reasons we looked at M5 was such an important potential partner for us and then consummate the marriage.

So differentiation is here to stay. It is up to us to execute well. There are not many companies have that many lovely advantages, we just have to execute well.

So let’s talk a little bit about why it can’t change. The competition is good. We have great respect for our competition. The Cisco and Avaya would have to jump through hoops to change TCO capability, very, very hard to do so. We have Microsoft Lync, that’s new again in town, great function feature set for us. One our customers who explained, if you want to compare apples with apples and do a complete TCO evaluation and get an N+1 redundancy and have a voice system that is always there, very expensive.

So we feel very strongly that the competitive landscape where you have to work hard every day and win every day, we have an inherit advantage. We aim to keep it.

Hosted, changing subjects from on-premise back to Hosted, it’s very interesting. An on premise when the ShoreTel founders like Ed Basart started the company and he is still our CTO today, they knew that they are entering the market where they could win if they did all the engineering and everything else right, but then always be a big competitor, and bit better. When they started I was this way, they are now two, it is two of them combined.

The interesting thing about Hosted is there is no big competitor. None. Also people could have potential NAV, but M5 already stands out as one the leaders and we think with the combination of the new companies in doing the right things and leveraging the joint R&D is a huge potential for us to be a leader in the cloud industry, because the space is wide open.

So the challenges continuing to grow. Let me talk about the on-premise and talk about cloud. On on-premise we have a very rich feature set. We have ShoreTel 13; it is in Beta test now, it going to help us a lot more with SIP functionality.

We have ShoreTel 14; about this about this time next year it will come to the customer and it is already in Alpha. When ShoreTel 14 starts to get some huge additional advantages. You heard the news today about one of our competitors potentially buying Radvision Prep out today. That’s not been formally announced, but there are a lot of rumors out there. We decided when we looked at our strategy meeting in June I that partnership was far better solution. As a smaller company we want to leverage these partnership goals, so in ShoreTel 14 we have built interoperability. So from your desktop video system, you can interact with a room size Polycom or LifeSize system and get that in direction; complete interoperability very, very good functionality. So that is part of ShoreTel 14.

We also get a lot of new diagnostic tools. Why is that important? As the customers increase the footprint, increase the size, occasionally you get challenges, is it a ShoreTel system, is it something new in the network; and those of you who are experts on this would absolutely get that. Our new diagnostic and management tools in ShoreTel 14 enable much better analysis of, look this is really a network issue, you need to work with a carrier or look at some other aspect as well as us understanding that helping the customer, giving them counseling support to make their overall environment much better.

We also have a brand new series of phones coming out all SIP enabled; good margins on the phones, good capability, further growth potential. We have Call Center 8 coming out in the similar timeframe with new solutions enabling chat as you go into the call center, enabling better connectivity, better functionality.

So what I am saying here, without going into too much detail, is the roadmap is rich and we grow it, but it doesn't need huge investment any longer. We’ve done the work on ShoreTel 13 and ShoreTel 14 is very advance; we know what 15 is going to do, so we could start showing you real leverage in R&D as a percentage of revenue. Also courtesy of the M5 addition to the family the equation changes; once that is complete, we have 16% next financial year of R&D as a percentage of revenue.

One of the benefits of hosted is you need a less heavy R&D environment. You are not responsible to every operating system over the last three or four years. You have one operating system. It’s in the cloud. You update it. It’s always best. So it’s a less expensive R&D model. The combination gives us that leverage and plus and I want to emphasize this, we’ll keep investing the right way in R&D, but we don’t need to invest much more. So the leverage in the on-premise model is absolutely there.

We know that as we expand you’ve got to increase our support and capability. Don Joos is in charge of that, was very good at it, but that goes into cost of goods sold. So it doesn’t change the leverage model and our margin model in cost of goods sold has been consistent. And we got a long-term margin model which Mike will talk about is very competitive.

So leverage is then, how you increase sales and how you increased lead generation. We have looked at the sales increases over the last three years and there is a very strong correlation between adding people, successful sales people and revenue. So we have very high confidence in that model and how we manage it.

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