ShoreTel, Inc. (SHOR)

F4Q10 (Qtr End 06/30/10) Earnings Call Transcript

August 12, 2010 5:00 pm ET

Executives

Tonya Chin – Director, IR

John Combs – Chairman, President and CEO

Mike Healy – CFO

Analysts

Ryan Hutchinson – Lazard Capital Markets

Steven O’Brien – JP Morgan

Lynn Um – Barclays Capital

Rohit Chopra – Wedbush Securities

Mike Latimore – Northland Capital

Christopher King – Stifel Nicolaus

Greg Burns – Sidoti & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ShoreTel fourth quarter and fiscal 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session (Operator instructions) Thank you. I would now like to turn the conference over to Ms. Tonya Chin, Director of Investor Relations. You may begin.

Tonya Chin

Hello, and thanks for joining us today as we report our fourth quarter and fiscal year 2010 financial results. Joining me on the call today are ShoreTel’s CEO, John Combs; and Chief Financial Officer, Mike Healy.

Before we begin, I will 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 revenue, gross margin, 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 the forward-looking statements can be found in the company’s Annual Report on Form 10-K, as amended, for the fiscal year ended June 30th, 2009; its 10-Q for the quarter ended March 31st, 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 in 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, other adjustments, and the related tax impact. During today’s call, we will be discussing both our fourth quarter and fiscal year 2010 results.

Now, I’ll turn the call over to John Combs, CEO of ShoreTel. John?

John Combs

Thank you, Tonya, and thanks to all of you for joining us today. I will review the highlights of our outstanding fourth-quarter financial performance.

Revenues of $42.2 million in the fourth quarter were well above the high end of our guided range of $35 million and $38 million, and slightly higher than our July 14 preannounced range of $41 million to $42 million. We were very pleased to see our fourth quarter’s revenue increase by 14% sequentially over the previous quarter, and a strong 30% over the fourth quarter of fiscal 2009.

Product revenues grew 16% sequentially, while service and support revenue grew 8% sequentially. Non-GAAP gross margins were another record at 66.8% and our non-GAAP net loss came in better than expected at $954,000 or a loss of $0.02 per share.

Fiscal 2010 revenues were $148.5 million, up 10% over last year’s revenue of $134.8 million. Non-GAAP gross margins for the fiscal year were 65.6%, up from 64.2% in fiscal 2009. Non-GAAP net loss was $2.5 million or $0.05 per share reflecting our increased spending associated with our strategic objectives we announced in October of 2009.

Before I get into the details of the quarter, I’d like to take a minute to reflect what we have accomplished in the past year. In October of last year, we announced a three-part strategic plan aimed at growing and increasing our consideration rate. Looking back, we took a calculated risk regarding the timing of these investments, which have clearly paid off. The investments we made in our business has driven our Q4 revenues to the highest level in company history by a wide margin.

I’m very pleased that we were able to continue to grow our market share and during the March quarter moved into the top three suppliers in IP telephony in the United States according to Synergy Research. As we all know, we have been operating at a down-market for over two years. Using the most recent data published by Synergy Research, the market for IP telephony in the United States declined 21% between March 2008 and March 2010, and the worldwide market declined 24%. In that same period, ShoreTel was able to show revenue growth of 15%, and as a result we continue to capture market share.

During the March 2010 quarter, our US IP telephony market share grew to 5.2%, moving us into the number three position in the United States in the enterprise IP telephony market behind Cisco and Avaya. And in the pure IP market, which excludes hybrid systems our market share is even higher at 7.5%. We increased our worldwide (inaudible) sales team by over 40% from Q4 2009 to Q4 2010. These new members in the team have ramped quickly as evidenced by our sales productivity metrics, which improved by 6% in Q4, despite the fact that approximately one third of our sales team have been with us less than a year.

We recently introduced ShoreTel 11 and Contact Center 6 further enhancing our product’s competitive advantage, and I’m very encouraged by the fact that we have seen an improvement in our brand awareness, which had increased our consideration rate over the past year. As we close our fourth quarter, we analyzed the primary drivers for our strong growth we saw during Q4. We confirmed our competitive win rate continues to be exceptional, well north of 50%.

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