ShoreTel® (NASDAQ:SHOR), the leading provider of brilliantly simple phone and Unified Communication (UC) systems for both premise and cloud-based solutions, today announced financial results for its fiscal fourth quarter and fiscal year 2012.

For the fourth quarter of fiscal 2012, consolidated revenue was $78.5 million, an increase of 39 percent sequentially over the third quarter of fiscal 2012 and an increase of 39 percent from the fourth quarter of fiscal 2011. Fourth quarter revenue includes a full quarter of revenue from the Cloud division, formerly M5 Networks, which was acquired on March 23, 2012. The non-GAAP net loss for the fourth quarter of fiscal year 2012 was $(0.2) million, or $(0.00) per share which excludes stock-based compensation charges, amortization of acquisition-related intangibles, other charges and related tax adjustments. This compares with non-GAAP net income of $1.3 million, or $0.03 per share, in the fourth quarter of fiscal 2011.

For the 2012 fiscal year, consolidated revenue was an all-time record of $246.6 million, up 23 percent from fiscal year 2011. The non-GAAP net loss for fiscal year 2012 was $(1.4) million, or $(0.03) per share, which excludes stock-based compensation charges, amortization of acquisition-related intangibles, litigation settlement costs, other charges and related tax adjustments. This compares with non-GAAP net income of $0.7 million, or $0.01 per share, in fiscal 2011.

“This year we took an important step to position ShoreTel for long-term market leadership through the acquisition of the unified communications cloud pioneer M5 Networks. With this addition, ShoreTel can offer customers a full range of premise, cloud or hybrid solutions,” said Peter Blackmore, president and CEO of ShoreTel. “Despite economic headwinds, ShoreTel once again improved our market share in the March quarter, growing from 6.5 percent to 7.7 percent in the United States Enterprise IP Telephony market, according to Synergy Research, further extending our position as the third largest vendor in the United States.”

Blackmore added, “Our premise business is strong and continues to grow. We were pleased to deliver a solid operating profit in this part of our business in the fourth quarter and for our fiscal year. With growth in fourth quarter cloud bookings of over 40 percent year-over-year, we are convinced that it is the right time to press for a market leadership position. We plan to make appropriate investments in our cloud infrastructure to support the strong bookings growth we expect as we move forward into fiscal 2013.”

Fourth Quarter 2012 Financial Highlights

GAAP gross margin for the fourth quarter of fiscal year 2012 was 60.9 percent, compared with 65.6 percent in the fourth quarter of fiscal year 2011. The year-over-year decline was the result of the inclusion of a full quarter of the Cloud division, which has lower gross margins.

Non-GAAP gross margin for the fourth quarter of fiscal year 2012, which excludes stock-based compensation charges, amortization of acquisition-related intangibles, and related tax adjustments, was 62.6 percent, compared with 66.3 percent in the year-ago quarter.

GAAP net loss was $(5.0) million, or $(0.09) per share, in the fourth quarter of 2012, compared with a GAAP net loss of $(1.7) million, or $(0.04) per share, in the fourth quarter of fiscal 2011.

As of June 30, 2012, the company had $55.5 million in cash, cash equivalents and short-term investments after paying down its line of credit by $5.0 million during the quarter. For fiscal year 2012, the company generated over $10.0 million in cash flow from operations.

Fiscal Year 2012 Financial Highlights

GAAP gross margin for the 2012 fiscal year was 64.3 percent, compared with 66.7 percent for the 2011 fiscal year.

Non-GAAP gross margin, which excludes stock-based compensation charges, amortization of acquisition-related intangibles, and related tax adjustments, was 65.4 percent for the 2012 fiscal year, compared with 67.3 percent for the 2011 fiscal year.

Non-GAAP operating income for fiscal year 2012 was $0.2 million, compared with $0.1 million for the 2011 fiscal year.

GAAP net loss for fiscal 2012 was $(20.7) million, or $(0.41) per share, which included non-cash stock-based compensation charges of $12.6 million, acquisition related deal costs of $4.5 million, amortization of acquisition-related intangibles of $2.8 million as well as other charges, and compared to a GAAP net loss of $(11.5) million, or $(0.25) per share, in fiscal 2011.

Line of Business Results

Premise

The company’s premise business was strong in the fourth quarter of fiscal 2012, delivering 17 percent sequential revenue growth from the third fiscal quarter. Non-GAAP gross margins in the premise business were 67.1 percent in the fourth quarter of fiscal 2012, up from 66.3 percent in the fourth quarter of fiscal 2011. Revenue from the company’s international sites represented 13 percent of its premise business in the fourth quarter of fiscal 2012, and increased 20 percent over the year-ago quarter. Additionally, according to Synergy Research, the company’s share of the United States Enterprise IP Telephony market increased from 6.5 percent in the December quarter of 2011 to 7.7 percent in the March quarter of 2012.

Cloud

The cloud segment represents a rapidly growing portion of the VoIP market. Industry forecasts show cloud solutions will grow at more than a 30 percent compound annual growth rate. Today cloud solutions represent six percent of the market and are expected to reach between 15 and 20 percent of the market by 2016. Based on strong bookings, the company plans to make incremental investments in its cloud business infrastructure and operations to capitalize on the expected segment growth.

Select Operational Metrics
 

Three Months EndedJune 30, 2012
 
Cloud Monthly Average Revenue Per User (ARPU) $ 62
 
Cloud Average # of Seats per Subscriber 34
 
Cloud Monthly Revenue Churn Rate 0.3%
 
Total Company Headcount 933
 
Non-GAAP Gross Margins-Premise 67.1%
Non-GAAP Gross Margins-Cloud 42.2%

Business Highlights

Partnership with Polycom and HP to Provide Bundled Solutions

In May, the company announced that it is providing a promotional incentive for bundled offerings that include ShoreTel, Polycom and HP solutions, which allow implementation of complete UC solutions on a secure, resilient and flexible network infrastructure. The combination of ShoreTel, Polycom and HP allows organizations to simplify design and management, deliver a consistent user experience (including video, voice, instant messaging (IM) and presence), and increase reliability and resiliency with uninterrupted availability.

Introduction of ShoreTel 13

The company recently announced the global availability of ShoreTel 13, its latest software release, which includes enhanced capabilities for video communications and IM for overall employee productivity.

New Head of World-wide Sales

In July, the company announced it hired David Petts as senior vice president of worldwide sales reporting directly to ShoreTel CEO Peter Blackmore. The  recently announced new sales leadership team which includes Joe Vitalone in channel management, Tim Gaines as head of North America sales, and Mark Arman as head of international sales and worldwide distribution, report to Petts.

Mobility Solution for Cloud Customers

In June, the company released ShoreTel  Mobility for customers of ShoreTel’s Cloud division. The solution further extends the popular voice and UC applications to the smartphone. The initial launch supports iPhones and subsequent releases over the summer will add support for other smartphone and tablet devices, including Android and Blackberry.

Business Outlook

ShoreTel is providing the following outlook for the quarter ending Sept. 30, 2012:
  • Revenue is expected to be in the range of $69.0 million to $75.0 million.
  • GAAP gross margin is expected to be in the range of 60 percent to 61 percent, including approximately $1.4 million in stock-based compensation charges and amortization of acquisition-related intangibles. Non-GAAP gross margin, which excludes stock-based compensation and other charges, is expected to be in the range of 62 percent to 63 percent.
  • GAAP operating expenses are expected to be in the range of $51.5 million to $52.5 million, including approximately $4.0 million in stock-based compensation charges and amortization of acquisition-related intangibles. Non-GAAP operating expenses, which exclude stock-based compensation and other charges, are expected to be in the range of $47.5 million to $48.5 million.

Conference Call Information

The company will host a corresponding conference call and live webcast today at 2:00 p.m. Pacific Daylight Time. To access the conference call, dial +1-888-401-4689 for callers in the U.S. or Canada and +1-719-325-2310 for international callers and provide the operator with the conference identification number of 6334894. A live webcast will be available in the Investor Relations section of the company's corporate web site at www.shoretel.com and an archived recording will be available beginning approximately two hours after the completion of the call until the company's announcement of its financial results for the next quarter. An audio telephonic replay of the conference call will also be available beginning at approximately 4:00 p.m. Pacific Daylight Time today until approximately 4:00 p.m. Pacific Daylight Time on August 21, 2012 by dialing +1-888-203-1112 or +1-719-457-0820 for callers outside the U.S. and Canada and providing the conference identification number of 6334894.

Use of Non-GAAP Financial Measures

ShoreTel reports all required financial information in accordance with generally accepted accounting principles in the United States (“GAAP”), but it believes that evaluating its ongoing operating results may be difficult to understand if limited to reviewing only GAAP financial measures. Many investors have requested that ShoreTel disclose this non-GAAP information because it is useful in understanding the company’s performance as it excludes non-cash charges, other non-recurring adjustments and related tax adjustments, that many investors feel may obscure the company’s true operating performance. Likewise, management uses these non-GAAP measures to manage and assess the profitability of its business and does not consider stock-based compensation charges and amortization charges related to acquisition-related intangible assets, which are non-cash charges, or other non-recurring items in managing its core operations. ShoreTel has provided a reconciliation of non-GAAP financial measures following the text of this press release. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure.

Legal Notice Regarding Forward-Looking Statements

ShoreTel assumes no obligation to update the forward-looking statements included in this release. This release contains forward-looking statements within the meaning of the “safe harbor” provisions of the federal securities laws, including, without limitation, statements by Peter Blackmore, statements regarding future products and statements in the “Business Outlook” section regarding ShoreTel’s anticipated future revenues, gross margins, operating expenses and other financial information. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The risks and uncertainties include global economic uncertainty, the pace of economic recovery in the U.S., and the impact thereof on information technology spending, the intense competition in our industry, our reliance on third parties to sell and support our products, supply and manufacturing risks, our ability to control costs as we expand our business, increased risk of intellectual property litigation by entering into new markets, our ability to attract, retain and ramp new sales personnel, uncertainties inherent in the product development cycle, uncertainty as to market acceptance of new products and services, the potential for litigation in our industry, risks related to our recently-completed acquisition of M5 Networks, including technology and product integration risks, ability to retain key personnel and customers and the risk of assuming unknown liabilities, and other risk factors set forth in ShoreTel’s Form 10-K for the year ended June 30, 2011, and in its Form 10-Q for the quarter ended March 31, 2012.

About ShoreTel, Inc.

ShoreTel, Inc. (NASDAQ: SHOR) brings unmatched flexibility, choice and value to brilliantly simple business phones systems and unified communications (UC). With its award-winning premise-based IP phone system with integrated unified communications, contact center capabilities, and its proven hosted VoIP services, organizations of all sizes can select the best option for their needs. ShoreTel’s ongoing mission is to eliminate costly complexity and give customers the 24/7 freedom to leverage rich voice, video, data and mobile unified communications capabilities they need. ShoreTel is based in Sunnyvale, California, and has regional offices in Austin, Texas; Rochester and New York, N.Y.; Chicago, Ill.; Maidenhead, United Kingdom; Sydney, Australia; and Singapore. For more information, visit www.shoretel.com.
SHORETEL, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Amounts in thousands)(Unaudited)
 
  As ofJune 30,2012   As ofMarch 31,2012   As ofJune 30,2011
 
ASSETS
Current assets:
Cash and cash equivalents $ 37,120 $ 40,328 $ 89,695
Short-term investments 18,375 20,994 16,057
Accounts receivable - net 34,198 32,746 33,812
Inventories 20,212 23,176 19,062
Prepaid expenses and other current assets   5,275     5,807     3,540  
Total current assets 115,180 123,051 162,166
 
Property and equipment - net 12,811 12,578 8,236
Goodwill 120,212 119,273 7,415
Intangible assets 45,304 47,651 8,570
Other assets   1,925     1,240     714  
Total assets $ 295,432   $ 303,793   $ 187,101  
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Accounts payable $ 9,747 $ 11,289 $ 6,394
Accrued liabilities and other 17,094 19,976 8,533
Accrued employee compensation 12,151 9,379 11,022
Contingent consideration 9,398 9,132 -
Deferred revenue   35,829     36,509     26,362  
Total current liabilities 84,219 86,285 52,311
 
Line of credit - net 19,946 24,947 -
Long-term deferred revenue 13,683 12,962 11,321
Long-term contingent consideration 3,305 3,368 -
Other long-term liabilities   4,047     4,998     2,045  
Total liabilities   125,200     132,560     65,677  
 
Stockholders' equity:
 
Common stock 310,648 306,604 241,103
Accumulated deficit   (140,416 )   (135,371 )   (119,679 )
Total stockholders' equity   170,232     171,233     121,424  
 
Total liabilities and stockholders' equity $ 295,432   $ 303,793   $ 187,101  
 

SHORETEL, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share amounts)(Unaudited)
       
Three Months EndedJune 30, Twelve Months EndedJune 30,
2012 2011 2012 2011
 
Revenue:
Product $ 51,108 $ 45,306 $ 182,009 $ 159,693
Hosted and related services 14,253 - 15,547 -
Support and services   13,097     11,221     49,076     40,419  
Total revenues 78,458 56,527 246,632 200,112
Cost of revenue:
Product 17,166 15,364 61,884 52,957
Hosted and related services 9,024 - 9,804 -
Support and services   4,477     4,072     16,465     13,688  
Total cost of revenue   30,667     19,436     88,153     66,645  
Gross profit 47,791 37,091 158,479 133,467
Gross profit % 60.9 % 65.6 % 64.3 % 66.7 %
 
Operating expenses:
Research and development 14,719 12,152 51,909 45,548
Sales and marketing 29,413 20,422 94,797 74,859
General and administrative 7,949 6,112 27,468 24,890
Acquisition-related costs   36     -     4,524     340  
Total operating expenses   52,117     38,686     178,698     145,637  
Loss from operations (4,326 ) (1,595 ) (20,219 ) (12,170 )
Other income (expense) - net   (866 )   (140 )   (1,465 )   640  
Loss before provision for income tax (5,192 ) (1,735 ) (21,684 ) (11,530 )
Provision for (benefit from) income tax   (147 )   10     (947 )   (67 )
Net loss $ (5,045 ) $ (1,745 ) $ (20,737 ) $ (11,463 )
Net loss per share:
Basic $ (0.09 ) $ (0.04 ) $ (0.41 ) $ (0.25 )
Diluted $ (0.09 ) $ (0.04 ) $ (0.41 ) $ (0.25 )
 
Shares used in computing net loss per share:
Basic   57,932     47,126     50,591     46,177  
Diluted   57,932     47,126     50,591     46,177  
 

SHORETEL, INC.GAAP to Non-GAAP Reconciliation(Amounts in thousands, except per share amounts)(Unaudited)
       
Three Months EndedJune 30, 2012 Twelve Months EndedJune 30, 2012
GAAP Excludes Non-GAAP GAAP Excludes Non-GAAP
Revenue:
Product $ 51,108 $ - $ 51,108 $ 182,009 $ - $ 182,009
Hosted and related services 14,253 - 14,253 15,547 - 15,547
Support and services   13,097     -     13,097     49,076     -     49,076  
Total revenues 78,458 - 78,458 246,632 - 246,632
Cost of revenue:
Product 17,166 (286 ) (a),(b) 16,880 61,884 (1,022 ) (a),(b) 60,862
Hosted and related services 9,024 (786 ) (a),(b) 8,238 9,804 (850 ) (a),(b) 8,954
Support and services   4,477     (218 ) (a)   4,259     16,465     (836 ) (a)   15,629  
Total cost of revenue   30,667     (1,290 )   29,377     88,153     (2,708 )   85,445  
Gross profit 47,791 1,290 49,081 158,479 2,708 161,187
Gross profit % 60.9 % 62.6 % 64.3 % 65.4 %
 
Operating expenses:
Research and development 14,719 (790 ) (a) 13,929 51,909 (3,614 ) (a) 48,295
Sales and marketing 29,413 (1,776 ) (a),(b) 27,637 94,797 (5,043 ) (a),(b) 89,754
General and administrative 7,949 (1,003 )

(a),(b),(c) 
6,946 27,468 (4,534 )

(a),(b),(c) 
22,934
Acquisition-related costs   36     (36 ) (d)   -     4,524     (4,524 ) (d)   -  
Total operating expenses   52,117     (3,605 )   48,512     178,698     (17,715 )   160,983  
Income (loss) from operations (4,326 ) 4,895 569 (20,219 ) 20,423 204
Other income (expense) - net   (866 )   203   (e)   (663 )   (1,465 )   203   (e)   (1,262 )
Income (loss) before provision for income tax (5,192 ) 5,098 (94 ) (21,684 ) 20,626 (1,058 )
Provision for (benefit from) income tax   (147 )   263   (f)   116     (947 )   1,315   (f)   368  
Net income (loss) $ (5,045 ) $ 4,835   $ (210 ) $ (20,737 ) $ 19,311   $ (1,426 )
Net income (loss) per share:
Basic $ (0.09 ) $ 0.09   $ (0.00 ) $ (0.41 ) $ 0.38   $ (0.03 )
Diluted (g) $ (0.09 ) $ 0.09   $ (0.00 ) $ (0.41 ) $ 0.38   $ (0.03 )
 
Shares used in computing net income (loss) per share:
Basic   57,932     57,932     50,591     50,591  
Diluted (g)   57,932     57,932     50,591     50,591  
 
 
(a) Excludes stock-based compensation included in:
Cost of product revenue $ 26 $ 132
Cost of hosted and related services 37 37
Cost of support and services revenue 218 836
Research and development 790 3,614
Sales and marketing 925 4,031
General and administrative   965     3,993  
$ 2,961   $ 12,643  
 
(b) Excludes amortization of acquisition-related intangibles included in:
Cost of product revenue $ 260 $ 890
Cost of hosted and related services 749 813
Sales and marketing 851 1,012
General and administrative   38     41  
$ 1,898   $ 2,756  
 
(c) Excludes litigation settlement included in:
General and administrative $ -   $ 500  
 
(d) Excludes direct acquisition costs included in:
Acquisition-related costs $ 36   $ 4,524  
 
(e) Excludes interest charge from change in fair value of contingent consideration included in:
Other expense $ 203   $ 203  
 
(f) Excludes the deferred tax benefit arising from acquisition and tax impact of the items which are excluded in (a) to (e) above.
 

(g) 

Potentially dilutive securities were not included in the calculation of diluted net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.

 

SHORETEL, INC.GAAP to Non-GAAP Reconciliation(Amounts in thousands, except per share amounts)(Unaudited)
       
Three Months EndedJune 30, 2011 Twelve Months EndedJune 30, 2011
GAAP Excludes Non-GAAP   GAAP Excludes Non-GAAP
Revenue:
Product $ 45,306 $ - $ 45,306 $ 159,693 $ - $ 159,693
Support and services   11,221     -     11,221     40,419     -     40,419  
Total revenues 56,527 - 56,527 200,112 - 200,112
Cost of revenue:
Product 15,364 (204 )

(a),(c)
15,160 52,957 (614 )

(a),(c)
52,343
Support and services   4,072     (206 ) (a)   3,866     13,688     (678 ) (a)   13,010  
Total cost of revenue   19,436     (410 )   19,026     66,645     (1,292 )   65,353  
Gross profit 37,091 410 37,501 133,467 1,292 134,759
Gross profit % 65.6 % 66.3 % 66.7 % 67.3 %
 
Operating expenses:
Research and development 12,152 (809 ) (a) 11,343 45,548 (3,497 ) (a) 42,051
Sales and marketing 20,422 (939 )

(a),(c) 
19,483 74,859 (3,170 )

(a),(c) 
71,689
General and administrative 6,112 (955 ) (a) 5,157 24,890 (4,266 )

(a),(b)
20,624
Acquisition-related costs   -     -     -     340     -     340  
Total operating expenses   38,686     (2,703 )   35,983     145,637     (10,933 )   134,704  
Income (loss) from operations (1,595 ) 3,113 1,518 (12,170 ) 12,225 55
Other income (expense) - net   (140 )   -     (140 )   640     -     640  
Income (loss) before provision for income tax (1,735 ) 3,113 1,378 (11,530 ) 12,225 695
Provision for (benefit from) income tax   10     80   (d)   90     (67 )   81   (d)   14  
Net income (loss) $ (1,745 ) $ 3,033   $ 1,288   $ (11,463 ) $ 12,144   $ 681  
Net income (loss) per share:
Basic $ (0.04 ) $ 0.07   $ 0.03   $ (0.25 ) $ 0.26   $ 0.01  
Diluted (e) $ (0.04 ) $ 0.07   $ 0.03   $ (0.25 ) $ 0.26   $ 0.01  
 
Shares used in computing net income (loss) per share:
Basic   47,126     47,126     46,177     46,177  
Diluted (e)   47,126     49,446     46,177     47,900  
 
 
(a) Excludes stock-based compensation included in:
Cost of product revenue $ 29 $ 123
Cost of support and services revenue 206 678
Research and development 809 3,497
Sales and marketing 928 3,140
General and administrative   955     3,741  
$ 2,927   $ 11,179  
 
(b) Excludes severance for former Chief Executive Officer included in:
General and administration $ -   $ 525  
 
(c) Excludes amortization of acquisition-related intangibles included in:
Cost of product revenue $ 175 $ 491
Sales and marketing   11     30  
$ 186   $ 521  
 
(d) Excludes the tax impact of the items which are excluded in (a) to (c) above.
 

(e) 

Potentially dilutive securities were not included in the calculation of diluted net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.

 

SHORETEL, INC.RECONCILIATION OF GAAP TO NON-GAAP FOR Q1 PROJECTIONS(Amounts in thousands)(Unaudited)
   
Three Months EndingSeptember 30, 2012
 

High

Low
GAAP gross profit % 61.0 % 60.0 %
Adjustments for stock-based compensation and acquisition-related intangible asset amortization   2.0 %   2.0 %
Non-GAAP gross profit %   63.0 %   62.0 %
 
Total GAAP operating expenses $ 52,500 $ 51,500
Adjustments for stock-based compensation and acquisition-related intangible asset amortization   (4,000 )     (4,000 )
Total non-GAAP operating expenses $ 48,500   $ 47,500  

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