SHOR

ShoreTel, Inc. (SHOR)

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ShoreTel, Inc. (SHOR)

Deutsche Bank dbAccess Technology Conference Call

September 12, 2012 5:40 am ET

Executives

Michael E. Healy – Senior Vice President and Chief Financial Officer

Tonya Chin – Director of Investor Relations

Analysts

Kip Clifton – Deutsche Bank Securities, Inc.

Presentation

Kip Clifton – Deutsche Bank Securities, Inc.

Good afternoon, everyone. I’m Kip Clifton; I’m on DB’s Wireless Equipment Research Team. I’m joined by Mike Healy, the CFO of ShoreTel; and Tonya Chin, who works in Investor Relations. To start this off, Mike is going to give a brief presentation and then I will start off some Q&A followed up by offering up to the audience.

So with that I will hand it over to Mike.

Michael E. Healy

Thanks, Kip. So we will have a few slides to go through and then we will get to Q&A. I just want to give an overview. Sorry, just reminding you that everyone that I may make forward-looking statements and are referred to our Risk Factors in our SEC documents including our 10-Ks and 10-Qs to adequately evaluate those risk factors.

So, ShoreTel, little bit of change since we were here last year, but we are a IP Telephony UC player. We’ve got a cloud business and a premise business and as well as mobility business. We acquired our cloud business through an acquisition of M5 Networks in March. So June was the first full quarter of revenue with that organization.

We are wide in presence over 24,000 customers, about 22,000 on the premise side and 2,000 customers on the cloud side. Target market and kind of both areas is really 50 to 5,000, is our sweet spot. That’s where we have the majority of our customer wins, but we do go up. Our largest customer today is Robert Half, over 10,000 licenses on the premise side. And then on the cloud side, we have customers with 100s of seats if not moving away to see customers with 1000s of seat.

In terms of – we on the cloud side, we’re a service organization. You outsource all of our IP Telephony operations to our company. And on the premise side, we sell our products through value-added resellers and of course one step resellers. And we are on that deck as part of under Shore. So the markets we are in are pretty large as you would imagine. I am here, I am showing you 2011 to 2015 for IP Telephony UC applications contact center and cloud UC and Telephony, these are all from IDC, the numbers vary in range, first of all in the cloud side since it’s a new market. But what they are all consistent on in the cloud side is the CAGR over the next four or five years is going to be around 30%. So that’s what attracted us to get in to the hosted market and we found a great partner and then bought a network.

On the premise side, you can see IDC is estimating kind of 12% CAGR over next couple of years, in fact that we think next year’s growth will be a little slower than that single-digit. For our fiscal ’12 that just ended the growth, both on a worldwide basis and on the U.S basis was about flat and we grew our revenue about 15.5%. So again, we took a pretty substantial market share frankly. In the last two quarters, we’ve had our largest market share gains ever on the premise side.

And UC application is – all the other applications you have whether video or chat or mobile or presence and we incorporate all those into our UC offerings. Contact center is a separate offering that we provide to customers both on the cloud side and the premise side, a little smaller market, but generally important for our larger customers.

In terms of our offering, we are merging some of the things together like mobility is offered both on the premise side and the cloud side. But on the premise side, our product revenue consists of IP phones, switches and software. The phones are the largest pieces of revenue.

And people may ask you how the attach rate looking, are you seeing a progression towards softphones or people not buying the softphones and just going mobile. And in fact we are seeing – our mobility revenue continues to grow, but it’s more complementary to our revenue than taking away from the premise side. So our attach rate frankly is the highest it has ever been last quarter, the June quarter, on the premise side of the phone.

So we haven’t seen a big drop off and people moving away from desktop phones in the short term, but we are well prepared if that were to happen to our mobility technology. The IT Director, who wants to outfit his sales guys just with – being on the PBX and having them use their smartphone, they need to take a license to do that.

And on the cloud side, again as I mentioned, it’s a service that we provide, you kind of outsource your IP to IP vendor, you outsource your longest local and you're servicing, so it an all-in-one solution, its monthly recurring revenue and we bill our customers directly and the key there is keeping them happy, keeping the churn low, and we have an extremely low churn less that 4% annualized in terms revenue measurement.

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