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ShoreTel Reports Financial Results for Second Quarter Fiscal Year 2015

Hosted Bookings Grew 36 Percent Compared to Second Fiscal Quarter 2014; Achieved Records in Both Revenue and Non-GAAP Net Income
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SUNNYVALE, Calif., January 28, 2015   – ShoreTel® (NASDAQ: SHOR), the leading provider of brilliantly simple phone systems and unified communications (UC) solutions, today announced financial results for the second quarter of fiscal 2015, which ended December 31, 2014.

For the second quarter of fiscal 2015, total revenue was a record $90.9 million, an increase of 8 percent compared to the second quarter of fiscal 2014. Non-GAAP net income, which excludes stock-based compensation charges, amortization of acquisition-related intangibles, other charges and related tax adjustments, for the second quarter of fiscal year 2015, was $5.4 million, or $0.08 per diluted share. This compares with a non-GAAP net income of $3.2 million, or $0.05 per diluted share, in the second quarter of fiscal 2014. GAAP net loss was $6.8 million, or $0.11 per diluted share, in the second quarter of fiscal 2015, compared with a GAAP net loss of $0.9 million, or $0.02 per share, in the second quarter of fiscal 2014.

“We’ve continued our business momentum with investments in growth while also improving our key financial metrics.  The acceleration of our hosted bookings in the December quarter resulted in 33 percent growth for calendar year 2014, showing the effectiveness of the strategic actions we launched a year ago,” said Don Joos, president and CEO of ShoreTel.  “We’ve made continued progress in the development of our common platform, which we expect to introduce at our partner conference in April.”

Second Quarter of Fiscal 2015 Financial Highlights

Recurring revenues, which now consist of all revenue from hosted and related services plus support revenues from support and services, represented 46 percent of total revenue in the second quarter of fiscal 2015 and reached an annualized value of $166 million; an increase of 17 percent compared to the second quarter of fiscal 2014. The company adjusted its methodology for calculating its recurring revenue metrics to better reflect the predictability of the business and align with the reporting of its industry peers.

Non-GAAP total gross margin, which excludes stock-based compensation charges, amortization of acquisition-related intangibles and other charges, for the second quarter of fiscal year 2015, was 62.9 percent, compared with 60.7 percent in the year-ago period. GAAP gross margin for the second quarter of fiscal year 2015 was 60.8 percent, compared with 59.0 percent in the second quarter of fiscal year 2014.

Hosted revenues of $25.8 million were up 19 percent year-over-year and 3.5 percent sequentially.  Non-GAAP hosted gross margin was 45.4 percent in the second quarter of fiscal 2015, compared with 39.8 percent in the second quarter of fiscal 2014. GAAP hosted gross margin for the second quarter of fiscal year 2015 was 39.2 percent, compared with 35.2 percent in the second quarter of fiscal year 2014.  The total number of installed customer seats increased 24 percent over the second quarter of fiscal 2014 to approximately 167,500.  Revenue churn was approximately 4.5 percent annualized in the second quarter of fiscal 2015.

Product revenues of $46.9 million were up 1 percent year-over-year and down 2 percent sequentially.  Non-GAAP product gross margin was 67.0 percent in the second quarter of fiscal 2015, compared with 65.5 percent in the second quarter of fiscal 2014.  GAAP product gross margin for the second quarter of fiscal year 2015 was 66.7 percent, compared with 64.9 percent in the second quarter of fiscal year 2014.

Support and services revenues of $18.2 million were up 12 percent year-over-year and 2 percent sequentially. Non-GAAP support and service gross margin was 77.0 percent in the second quarter of fiscal 2015, compared with 74.8 percent in the second quarter of fiscal 2014. GAAP support and service gross margin for the second quarter of fiscal year 2015 was 76.4 percent, compared with 74.0 percent in the second quarter of fiscal year 2014.

As of December 31, 2014 the company had $75.7 million in cash, cash equivalents and short-term investments and no outstanding debt.  The company generated $11.8 million in cash flow from operations in the quarter ended December 31, 2014.

Second Quarter of Fiscal 2015:  Unusual Items

The second quarter of fiscal 2015 results include four unusual items totaling $8.9 million that are outside of the company’s normal business operations.  The related cash usage from these unusual items in the second quarter was $0.6 million. The company does not consider these items to be core to its ongoing business operations and therefore these results have been excluded from the non-GAAP financial results.

The company recorded a $0.5 million charge against its cost of hosted revenues due to a dispute with an equipment leasing vendor.

The company recorded a general and administrative expense of $6.7 million due to an arbitration ruling and a subsequent tentative settlement on escrow claims related to the acquisition of M5 Networks, which the company acquired in March 2012.

The company recorded a general and administrative expense of $1.1 million related to a proposed IRS audit assessment for the 2008-2012 tax years.

The company recorded a general and administrative expense of $0.6 million for outside professional fees related to its evaluation of an unsolicited proposal received in the December 2014 quarter.

Selected Operational Metrics

Second Quarter of Fiscal 2015 Business Highlights

ShoreTel Ranked Highest Vendor in Customer Loyalty, Service and Value, Finds Nemertes Study

According to a recent Nemertes Research study, ShoreTel rates best among leading UC and IP Telephony vendors in customer loyalty, service and value by IT professionals.

For Nemertes’ 2014 Unified Communications and Collaboration PilotHouse program, 500 IT decision-makers were asked to identify, rate and weight their primary providers in various areas including IP Telephony and integrated Unified Communications.

Weightings and ratings were combined with Nemertes’ assessment scores for provider strategy and financial viability. ShoreTel was named the top provider overall for Enterprise IP Telephony, beating out Microsoft, Cisco, and Avaya.

IT professionals who use ShoreTel for Unified Communications suites ranked it highest in customer service, and ShoreTel also received the highest customer service score among all providers in the study in both Enterprise IP Telephony and Midmarket Unified Communications.

ShoreTel ranked best in customer loyalty in more technology segments than any other vendor in the study, outperforming Avaya, Cisco, IBM, and Microsoft. In the Midmarket, Enterprise Unified Communications, and Enterprise IP Telephony segments ShoreTel had the highest percentage of customers who plan to stay with their provider for the next two years.

Lastly, as for value, the Nemertes study found it to be the most important criteria to customers in Enterprise IP Telephony, and ShoreTel received the highest value score among all competitors in the study. 

ShoreTel’s Innovation Network Grows to 85 Partners

ShoreTel announced that its Innovation Network has grown to 85 partners. The Innovation Network enables application developers to leverage ShoreTel's open architecture to develop hardware, software, and services that enhance and extend the capabilities of ShoreTel's UC and enterprise contact center solutions.

ShoreTel’s Innovation Network technical experts support customers, technology providers and software developers to build advanced, integrated applications on ShoreTel's open platform using commonly known and widely accepted techniques.

As a result, the Innovation Network creates an opportunity for ShoreTel to extend the features and operability of its solutions in a low-cost, high-quality development environment.

ShoreTel Enterprise Contact Center Receives 2014 CUSTOMER Contact Center Technology Award

TMC’s CUSTOMER magazine named ShoreTel Enterprise Contact Center as a 2014 CUSTOMER Contact Center Technology Award winner for demonstrating innovation, quality and unique features which have had a positive impact on the customer experience.

ShoreTel offers flexible contact center solutions - from smaller, less formal environments to large organizations requiring multichannel, sophisticated routing, enhanced reporting options, self-service and outbound campaign capabilities.  Built on the highly reliable ShoreTel unified communications system, ShoreTel Enterprise Contact Center easily connects internal and external customers to the right agent at the right time.

This ninth-annual Contact Center Technology Award, presented by CUSTOMER Magazine, honors vendors and technologies that have embraced technology as a key tool for customer service excellence.

Brilliantly Simple Mobile Video Collaboration Now Available with ShoreTel Sky Mobility

In December 2014, ShoreTel launched an update to ShoreTel Sky® Mobility that empowers ShoreTel users with mobile-enabled video conferencing capabilities. ShoreTel Mobility 8 is now available for ShoreTel Sky users, bringing functionality previously made available to on-premises customers to the cloud.

ShoreTel Sky Mobility makes it easy to communicate via video between iOS® and AndroidTM smartphones and tablets using the ShoreTel Sky Mobility Client, with single touch video calling from the keypad. Point-to-Point video within the enterprise is supported and video calls can be placed over local or remote Wi-Fi and cellular networks. The ability to add video to existing voice calls or revert a video call to voice-only is also supported.

Another enhancement to the ShoreTel Sky Mobility client is the addition of the “join” button for one-touch audio bridge login, which frees users from juggling apps while trying to memorize numbers and passcodes. The “join” button also works with third-party Web collaboration tools.

Business Outlook

ShoreTel is providing the following outlook for its fiscal third quarter of 2015 ending March 31, 2015:

  • Total revenue is expected to be in the range of $84.0 million to $90.0 million.
  • Non-GAAP gross margin, which excludes approximately one and one-half percentage points in stock-based compensation charges, amortization of acquisition-related intangibles and other charges, is expected to be in the range of 61.5 percent to 62.5 percent.  GAAP total gross margin is expected to be in the range of 60 percent to 61 percent.
  • Non-GAAP operating expenses, which exclude approximately $2.5 million in stock-based compensation expenses, amortization of acquisition-related intangibles and other charges, are expected to be in the range of $51.0 million to $52.0 million.  GAAP total operating expenses are expected to be in the range of $53.5 million to $54.5 million.

ShoreTel is providing the following updated outlook for its Hosted revenues for the fiscal year 2015 ending June 30, 2015:

  • Hosted revenues for the fiscal 2015 year are now expected to grow around 20% compared to fiscal 2014. The company is projecting the revenue associated with regulatory and telecom fees to be lower than previously expected. Revenue from the core hosted offering, including profiles and applications, continues to perform slightly above the company’s prior forecast.

Conference Call Information

The Company will host a corresponding conference call and live webcast at 2:00 p.m. Pacific Time on Wednesday, January 28, 2015.  To access the conference call, dial + 1-866-652-5200 for callers in the U.S. or + 1-412-317-6060 for international callers and ask to join the ShoreTel call.

A live webcast will be available in the Investor Relations section of the Company's corporate website at http://ir.shoretel.com/ and an archived recording will be available beginning approximately two hours after the completion of the call. An audio telephonic replay of the conference call will also be available beginning approximately one hour after the completion of the call until February 4, 2015 by dialing + 1-877-344-7529 for callers in the U.S. or + 1-412-317-0088 for callers outside the U.S. and providing the conference identification number of 10058876.

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 and the related tax adjustments, 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 Don Joos, statements regarding future growth, and statements regarding market demand, product and technology introductions, benefits of the innovation network and statements in the “Business Outlook” section regarding ShoreTel’s anticipated future revenues, gross margins, operating expenses (on a GAAP and non-GAAP basis) 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 the intense competition in our industry, our reliance on third parties to sell and support our products, our ability to continue to grow our cloud-based solutions, our ability to grow or maintain our premise products, supply and manufacturing risks, the impact of service disruptions or security breaches, uncertainties related to global operations, our ability to control costs as we expand our business, our ability to attract, retain and ramp new personnel, potentially longer sales cycles, uncertainties inherent in the product development cycle, our ability to identify and execute on strategic opportunities; ability of third parties to successfully market and sell our products, uncertainty as to market acceptance of new products and services, the potential for litigation in our industry, the uncertain impact of global economic conditions, including impact on customers’ purchasing decisions, and other risk factors set forth in ShoreTel’s Form 10-K for the year ended June 30, 2014, and in its Form 10-Q for the quarter ended September 30, 2014.

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About ShoreTel

ShoreTel, Inc. (NASDAQ: SHOR) is a leading provider of brilliantly simple IP phone systems and unified communications solutions powering today’s always-on workforce. Its flexible communications solutions for on-premises, cloud and hybrid environments eliminate complexity, reduce costs and improve productivity. Recognized for its industry-leading customer experience and support, ShoreTel’s innovative business phones, application integration, collaboration tools, mobility, and contact center applications enable users to communicate and collaborate no matter the time, place or device, with minimal demand on IT resources. ShoreTel is headquartered in Sunnyvale, Calif., and has regional offices and partners worldwide. For more information, visit www.shoretel.com.

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ShoreTel, ShoreTel Sky and the ShoreTel logo are trademarks or registered trademarks of ShoreTel, Inc. in the United States and/or other countries. iOS is a trademark or registered trademark of Cisco in the U.S. and other countries and is used under license. Android is a trademark of Google Inc.  All other trademarks, trade names and service marks herein are the property of their respective owners.

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