ShoreTel, Inc. ( SHOR)

F1Q11 Earnings Cal

October 28, 2010 5:00 pm ET

Executives

Tonya Chin - Director of IR

Don Girskis - Interim CEO

Mike Healy - CFO

Kevin Gavin - VP of Marketing

Analysts

Steve O’Brien - JP Morgan

Troy Jensen - Piper Jaffray

Ryan Hutchinson - Lazard Capital Markets

Chris - Stifel Nicholaus

Greg Burns - Sidoti

Rohit Chopra - Wedbush Securities

Mike Latimore - Northland Capital

Lynn Um - Barclays Capital

Davers Arovan - JMP Securities.

Presentation

Operator

Welcome to the ShoreTel First Quarter Fiscal Year 2011 Earnings Announcement. 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 Tonya Chin, Director of Investor Relations. You may begin your conference.

Tonya Chin

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

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, for the fiscal year ended June 30th, 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 the 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.

Now, I’ll turn the call over to Don Girskis, CEO of ShoreTel. Don?

Don Girskis

Thank you, Tonya, and thanks to all of you for joining us today. First, I will review the highlights of our Q1 financial performance. We were pleased to build on our record revenues last quarter and deliver revenues of $44.3 million in the quarter, up 5% sequentially over the previous quarter and 31% over the first quarter of fiscal 2010.

Non-GAAP gross margins were also another record at 67.2% and we recorded a very small non-GAAP loss of $197,000 in the quarter or breakeven on a per share basis.

Before I move into the operational highlights of the quarter let me take a minute to introduce myself. As most of you know, I have stepped into the CEO role on an interim basis as our ShoreTel’s Board of Directors completes a comprehensive search for our new CEO. We have hired Heidrick & Struggles to lead our search and our board of directors have received a lot of interest and are in the process of vetting candidates.

We will continue to move quickly to execute our plans as evidenced by our recent acquisition of the Agito Networks, which I’ll cover more in detail later in the call. I want to take a minute to thank John Combs to facilitating the very efficient transition for me into this new role and I can assure you that the senior team of ShoreTel is very engaged and excited to continue to build on the significant momentum we have been seen in our business.

One of the clear data points that demonstrate this momentum is ShoreTel’s growing market share position. In the June quarter ShoreTel once again showed strong improvement in its market share as reported by Synergy Research. In fact Synergy recently declared ShoreTel the fastest growing IP telephony vendor worldwide.

Additionally Synergy ranks ShoreTel as the number one UC Desktop Solution Provider on a world wide basis in the SMB market. During the June 2010 quarter ShoreTel’s US IP telephony market share improved to 5.6% further extending our number three position in the United States in the enterprise IP telephony market based on revenues.

In the pure IP market, which excludes hybrid systems our share grew to 8.2%. We see double-digit market share in the US pure IP market within our reach. Revenues from national partners, returned to growth in first quarter with a strong sequential improvement of 12%. US regional partner revenues also grew during the quarter building on the strong Q4 revenues from last quarter. We saw strength across our US based business with professional services, education, and financial being the largest revenue segments in quarter.

After two quarters of solid growth, international revenue declined $300,000 to $4.8 million and represented 11% of our total business. This was mostly driven by a few deals pushing to Q2 in Asia Pacific region, leaving us with the strong pipeline in that region going into the second quarter.

While down sequentially this performance represents strong growth of nearly 50% from Q1 last year. We are pleased to see billings from new customers improve to 45% of total business up from 41% in the fourth quarter as the new customer drove an increasing amount of our total sales in the quarter. This was further evidenced by our number of new customers in the quarter reaching an all time high at over 900, significantly up from 800 in the fourth quarter.

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