ShoreTel, Inc. (SHOR)

JP Morgan Global Technology Media and Telecom Conference

May 15, 2012, 10:00 a.m. ET


Mike Healy - SVP & CFO


[Unidentified Analyst]



Mike Healy

…in Silicon Valley. We have about, on the premise side about just over 20,000 customers we’ve sold to over the last 16 years, and on the Cloud side we have about 2,000 customers that came to us through our M5 acquisition. Our target market is the worldwide IP telephony market. From a UC standpoint, everything that goes into UC, which is voice, collaboration, IM presence; in both markets, whether it’s premise or hosted, are expected to grow reasonably well. Premise side, I think the growth this year with CAGR over the next five years will be +30%. So, two growing markets, obviously hosted is growing a lot faster, it’s a little smaller. Premise side is about a $15 billion annual market when you put voice, contact center and UC applications altogether.

From a focus standpoint, our focus is certainly to continue to grow the premise business, get that growth rate back up into the 20%, but really focus on software, Cloud and mobility. The two newest areas of our portfolio are really Cloud and mobility. The reason we do so well and we take market share on the premise side is the brilliant simplicity that comes with the architecture that our founder developed 16 years ago, and still is with us today. It leads to great levels of customer satisfaction, a great product, easy to learn, easy to install and the lowest total cost of ownership in the industry. Most of that total cost of ownership doesn’t come from the capital cost up-front when customers buy from us, but it’s really the system management and maintenance of the system, whether it’s moves, adds and changes, or training, or getting users up. We don’t even, in the total cost of ownership we don’t even add in any productivity gains from the employees’ love with our system.

We did close our acquisition of M5 Networks on March 23 rd, so we just had about eight days of results in the March quarter, and obviously we’ll have a full quarter of results in the June quarter. For the March quarter, they had very strong bookings, certainly better than their plan, and good growth over the December quarter. We’ll talk more about the results of M5 in the upcoming quarter, as we’ll have a full quarter of data.

But the biggest thing for us right now, on both sides of the business, is we’re committed to profitability for fiscal year ’13, and we’ve kind of been in and out of profitability every quarter, the last couple quarters, when our revenue goes down a little bit, our expenses are pretty consistent, and so we’ve been in and out of profitability. We’re striving for profitability for our fiscal year ’12, which ends in June. To do that, we have to hit the high end of the range of guidance for the quarter. But June is going well, we expect a strong quarter. It’s usually a big, strong quarter for us from a booking standpoint. It’s the end of our fiscal year, so our sales guys are really doing well to meet their year-end quotas, and at the end of the day we’re growing market share, we’ve got the best product industry, a high level of customer satisfaction, and we’re focusing on two key areas that are growing relatively fast, mobility and Cloud. And so, that’s a brief overview of where our focus is as a company, and then Rod has a number of questions and we’ll open it up.

Question-and-Answer Session

[Unidentified Analyst]

Thanks, Mike. Sorry I wasn’t here to introduce you. Thanks for kicking it off. I wanted to just go back to the hosted market a little bit, and talk about I guess the future, how you guys see the future developing. Premise has been the way things are done, hosted’s kind of this interesting new rent-it-while-you-use-it model. How do you think the market’s going to evolve over the next five years, do you think most people will end up hosted in the small and medium business category or do you think an awful lot will still be premise and there won’t be, hosted will still kind of be a small niche market?

Mike Healy

We think hosted will continue to grow rapidly. We think it’ll be bigger and bigger. Right now the average seat size of a hosted customer on our business is about 30 seats. I think that will grow over time. At a certain spot, it may make more sense for a customer to go to premise than hosted. In reality, I think at the end of the day, years from now, I think what we’ll have is potentially a hybrid solution where a lot of customers, they’ll have a decent-sized I.T. staff at their headquarters, and they may do on-premise there, where they can manage it, and then their remote locations, they may even go to a hosted solution there, so kind of a best of both worlds, so they don’t have to deploy staff, it’s easy to manage and manage the infrastructure out in these remote locations. Our goal is we’re going to give the customer an option, if they want hosted or premise. Frankly, we’re going to be impartial. Most customers have decided what they want to do when they come and put in an RFP, and then we’ll fulfill as they need, but we’re going to be impartial between whatever the customer wants and I think we’re one of the few that can offer that kind of solution.

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