SHOR Shoretel, Inc.

ShoreTel® (NASDAQ: SHOR), the leading provider of brilliantly simple premise and cloud-based business phone system and communication solutions with fully integrated unified communications (UC), today announced financial results for the third quarter of fiscal year 2012, which ended March 31, 2012.

ShoreTel’s consolidated results include eight days of operating results from ShoreTel’s cloud division, formerly known as M5 Networks, as the acquisition closed on March 23, 2012. For the third quarter of fiscal year 2012, consolidated revenue was $56.3 million, up 9 percent from the third quarter of fiscal year 2011. The GAAP net loss for the quarter was $(8.5) million, or $(0.17) per share and included a tax benefit of $1.0 million, compared with a GAAP net loss of $(2.4) million, or $(0.05) per share, in the third quarter of fiscal year 2011. Excluding acquisition-related transaction fees of $4.5 million, a tax benefit of $1.0 million, stock-based compensation expenses of $3.2 million, amortization of intangible assets of $0.4 million, and related tax adjustments, the non-GAAP net loss for the third quarter of fiscal year 2012 was $(1.5) million or $(0.03) per share. This compares with non-GAAP net income of $0.6 million, or $0.01 per share, in the third quarter of fiscal year 2011.

GAAP gross margin for the third quarter of fiscal year 2012 was 66.2 percent, compared with 68.0 percent in the third quarter of fiscal 2011. Non-GAAP gross margin, which excludes stock-based compensation expenses and amortization of intangible assets, was 67.2 percent in the third quarter of fiscal year 2012, compared with 68.6 percent in the third quarter of last year. Excluding the effects of the M5 acquisition, non-GAAP gross margins would have been 67.7 percent in the third quarter of fiscal 2012.

As of March 31, 2012, the company had $61.3 million in cash, cash equivalents and short-term investments after using $80.6 million in cash to fund a portion of the M5 acquisition.

“During the third quarter ShoreTel delivered steady growth year-over-year as well as strong gross margin expansion in our core premise business,” said Peter Blackmore, president and CEO of ShoreTel. “We remain very optimistic about the continued strength of our unified communications offerings and emerging opportunities within both the mobility and cloud markets.

“We are pleased to have completed the acquisition of M5 Networks during the quarter and are now focused on driving growth in our premise-based businesses and maximizing the potential of our cloud offering. We are also very pleased to see that the pipeline in our premise-based business is growing nicely – indicating that we can expect solid growth in our fourth fiscal quarter,” Blackmore added.

Operational Highlights for the Third Quarter of Fiscal Year 2012

Completed the Acquisition of M5

On March 23, 2012, the company completed its acquisition of M5 Networks. The addition of M5’s hosted VoIP solution uniquely positions ShoreTel to offer both on-premise and hosted VoIP and UC solutions to its customers. The combination significantly accelerates ShoreTel’s entrance into the cloud market. Under the terms of the agreement, M5 shareholders received approximately $80.6 million in cash and 9.5 million shares of ShoreTel stock, which equates to a total of $134.3 million in initial consideration. Additionally, M5 shareholders may receive additional contingent consideration of up to $13.7 million. The contingent payments are payable over the two years after closing and are based upon the achievement of certain revenue performance milestones for the year ended Dec. 31, 2012. M5’s CEO, Dan Hoffman, is now heading ShoreTel’s Cloud Division as its president and general manager. Approximately 200 of M5’s employees joined ShoreTel as of March 23, 2012.

Signed Partnership Agreement for Telstra Business Systems Program

In February, ShoreTel and Telstra entered into a partnership agreement whereby Telstra will market and support ShoreTel’s IP telephony, unified communications (UC), contact center and mobility solutions in Australia. With over 20 Telstra Business Partners accredited to install ShoreTel’s solutions in the Australian market already, the company expects this number to grow as a result of the new partnership agreement.

Lowest Total Cost of Ownership Validated by External Third Party

In January, the company announced that the results of an Aberdeen Group study of 236 different businesses showed that ShoreTel had the lowest total cost of ownership (TCO) of unified communications solutions. Total cost of ownership is a key metric for assessing costs, benefits and risks of a UC solution, enabling organizations to properly evaluate competing solutions. Ultimately, ShoreTel’s brilliant simplicity is what enables ShoreTel to provide the lowest total cost of ownership in the industry.

Business Outlook

The company is providing the following outlook for the quarter-ending June 30, 2012, which includes the operating results from ShoreTel’s Cloud Division (formerly M5 Networks):

• Revenue is expected to be in the range of $72 million to $77 million.
• GAAP gross margin is expected to be in the range of 60 to 61 percent, including approximately $1.3 million in amortization of intangibles and stock-based compensation expenses. Non-GAAP gross margin is expected to be in the range of 62 to 63 percent.
• GAAP operating expenses are expected to be in the range of $51.0 million to $52.5 million, which includes approximately $4.0 million in stock-based compensation expenses and amortization of intangibles. Non-GAAP operating expenses are expected to be in the range of $47.0 million to $48.5 million.

Use of Non-GAAP Financial Measures

ShoreTel reports all financial information required in accordance with generally accepted accounting principles (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 and other special charges that many investors feel may obscure the company’s true operating performance. Likewise, management uses these non-GAAP financial measures to manage and assess the profitability of its business and does not consider stock-based compensation expenses, amortization of acquisition-related intangibles, acquisition-related costs and other special charges and related tax adjustments in managing its core operations. ShoreTel has provided a reconciliation of non-GAAP financial measures in the tables of this press release. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures with their most directly comparable GAAP financial measure.

Conference Call Details for April 30, 2012

ShoreTel will host a corresponding conference call and live webcast at 2:00 p.m. Pacific Daylight Time on April 30, 2012. To access the conference call, dial +1-888-452-4030 for the U.S. and Canada or +1-719-325-2422 for international callers, and provide the operator with the conference identification number 5457128. The webcast will be available live in the Investor Relations section of the company’s corporate Web site at www.shoretel.com, and via replay beginning approximately two hours after the completion of the call and available until the company’s announcement of its financial results for the next quarter.

An audio replay of the call will also be available to investors beginning at approximately 4:00 p.m. Pacific Daylight Time on Apr. 30, 2012, until 4:00 p.m. Pacific Daylight Time on May 7, 2012, by dialing +1-888-203-1112, or +1-719-457-0820 for callers outside the U.S. and Canada, and entering the conference identification number 5457128.

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 relating to ShoreTel’s revenue growth, profitability, and opportunities within the mobility and cloud markets, 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 the information technology spending, particularly in the U.S., our reliance on third parties to sell and support our products, increased risk of intellectual property litigation by entering into new markets, uncertainty as to ShoreTel’s ability to retain and motivate key personnel from the acquired company, increased competition by entering into new markets, the success of our expanded channel strategy, the intense competition in our industry, our dependence on key suppliers and other supply and manufacturing risks, our ability to control costs, our ability to attract, retain and ramp new sales personnel, uncertainties inherent in the product development cycle, including unforeseen delays and unknown defects, 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, as updated in our Quarterly Reports on Form 10-Q on a quarterly basis.

About ShoreTel, Inc.

ShoreTel, Inc. (NASDAQ: SHOR) brings unmatched flexibility, choice and value to brilliantly simple business phone 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; New York, New York; 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 of   As of As of March 31, December 31, June 30,   2012     2011     2011     ASSETS Current assets: Cash and cash equivalents $ 40,328 $ 94,491 $ 89,695 Short-term investments 20,994 21,359 16,057 Accounts receivable - net 32,746 30,948 33,812 Inventories 23,176 22,602 19,062 Prepaid expenses and other current assets   5,807     4,598     3,540   Total current assets 123,051 173,998 162,166   Property and equipment - net 12,578 7,659 8,236 Goodwill 119,273 7,415 7,415 Intangible assets 47,651 7,828 8,570 Other assets   1,240     864     714   Total assets $ 303,793   $ 197,764   $ 187,101       LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 11,289 $ 7,882 $ 6,394 Accrued liabilities and other 19,976 10,122 8,533 Accrued employee compensation 9,379 9,486 11,022 Contingent consideration 9,132 - - Deferred revenue   36,509     32,965     26,362   Total current liabilities 86,285 60,455 52,311   Long-term line of credit, net 24,947 - - Long-term deferred revenue 12,962 12,241 11,321 Long-term contingent consideration 3,368 - - Other long-term liabilities   4,998     2,298     2,045   Total liabilities   132,560     74,994     65,677     Stockholders' equity:   Common stock 306,604 249,629 241,103 Accumulated deficit   (135,371 )   (126,859 )   (119,679 ) Total stockholders' equity   171,233     122,770     121,424     Total liabilities and stockholders' equity $ 303,793   $ 197,764   $ 187,101   SHORETEL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (Unaudited)             Three Months Ended Nine Months Ended March 31, March 31,   2012     2011     2012     2011     Revenue: Product $ 42,440 $ 41,248 $ 130,901 $ 114,387 Hosted and related services 1,294 - 1,294 - Support and services   12,570     10,329     35,979     29,198   Total revenues 56,304 51,577 168,174 143,585 Cost of revenue Product 14,160 12,979 44,718 37,593 Hosted and related services 780 - 780 Support and services   4,104     3,515     11,988     9,616   Total cost of revenue   19,044     16,494     57,486     47,209   Gross profit 37,260 35,083 110,688 96,376 Gross profit % 66.2 % 68.0 % 65.8 % 67.1 %   Operating expenses: Research and development 13,137 12,562 37,190 33,396 Sales and marketing 22,566 18,920 65,384 54,437 General and administrative 6,541 6,377 19,519 19,118 Acquisition-related costs   4,488     -     4,488     -   Total operating expenses   46,732     37,859     126,581     106,951   Loss from operations (9,472 ) (2,776 ) (15,893 ) (10,575 ) Other income (expense), net   (4 )   166     (599 )   780   Loss before provision for income tax (9,476 ) (2,610 ) (16,492 ) (9,795 ) Provision for (benefit from) income tax   (964 )   (228 )   (800 )   (77 ) Net loss $ (8,512 ) $ (2,382 ) $ (15,692 ) $ (9,718 ) Net loss per share: Basic $ (0.17 ) $ (0.05 ) $ (0.33 ) $ (0.21 ) Diluted $ (0.17 ) $ (0.05 ) $ (0.33 ) $ (0.21 )   Shares used in computing net loss per share: Basic   49,126     46,249     48,196     45,862   Diluted   49,126     46,249     48,196     45,862   SHORETEL, INC. GAAP to Non-GAAP Reconciliation (Amounts in thousands, except per share amounts) (Unaudited)     Three Months Ended Nine Months Ended March 31, 2012 March 31, 2012 GAAP Excludes Non-GAAP GAAP   Excludes Non-GAAP Revenue: Product $ 42,440 $ - $ 42,440 $ 130,901 $ - $ 130,901 Hosted and related services 1,294 - 1,294 1,294 - 1,294 Support and services   12,570     -     12,570     35,979     -     35,979   Total revenues 56,304 - 56,304 168,174 - 168,174 Cost of revenue Product 14,160 (292 ) (a),(b) 13,868 44,718 (736 ) (a),(b) 43,982 Hosted and related services 780 (64 ) (b) 716 780 (64 ) (b) 716 Support and services   4,104     (210 ) (a)   3,894     11,988     (618 ) (a)   11,370   Total cost of revenue   19,044     (566 )   18,478     57,486     (1,418 )   56,068   Gross profit 37,260 566 37,826 110,688 1,418 112,106 Gross profit % 66.2 % 67.2 % 65.8 % 66.7 %   Operating expenses: Research and development 13,137 (901 ) (a) 12,236 37,190 (2,824 ) (a) 34,366 Sales and marketing 22,566 (1,140 ) (a),(b) 21,426 65,384 (3,267 ) (a),(b) 62,117 General and administrative 6,541 (981 ) (a),(b) ,(c) 5,560 19,519 (3,531 ) (a),(b) ,(c) 15,988 Acquisition-related costs   4,488     (4,488 ) (d)   -     4,488     (4,488 ) (d)   -   Total operating expenses   46,732     (7,510 )   39,222     126,581     (14,110 )   112,471   Income (loss) from operations (9,472 ) 8,076 (1,396 ) (15,893 ) 15,528 (365 ) Other income (expense), net   (4 )   -     (4 )   (599 )   -     (599 ) Income (loss) before provision for income tax (9,476 ) 8,076 (1,400 ) (16,492 ) 15,528 (964 ) Provision for (benefit from) income tax   (964 )   1,040   (e)   76     (800 )   1,052   (e)   252   Net income (loss) $ (8,512 ) $ 7,036   $ (1,476 ) $ (15,692 ) $ 14,476   $ (1,216 ) Net income (loss) per share: Basic $ (0.17 ) $ 0.14   $ (0.03 ) $ (0.33 ) $ 0.30   $ (0.03 ) Diluted (f) $ (0.17 ) $ 0.14   $ (0.03 ) $ (0.33 ) $ 0.30   $ (0.03 )   Shares used in computing net loss per share: Basic   49,126     49,126     48,196     48,196   Diluted (f)   49,126     49,126     48,196     48,196       (a) Excludes stock-based compensation as follows: Cost of product revenue $ 32 $ 106 Cost of support and services revenue 210 618 Research and development 901 2,824 Sales and marketing 1,039 3,106 General and administrative   978     3,028   $ 3,160   $ 9,682     (b) Excludes amortization of acquisition-related intangibles: Cost of product revenue $ 260 $ 630 Cost of hosted and related services 64 64 Sales and marketing 101 161 General and administrative   3     3   $ 428   $ 858     (c) Excludes litigation settlement included in: General and administrative $ -   $ 500     (d) Excludes direct acquisition costs included in:

 

Acquisition-related costs $ 4,488   $ 4,488     (e) Excludes the deferred tax benefit arising from acquisition and tax impact of the items which are excluded in (a) to (d) above.   (f)

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 Ended Nine Months Ended March 31, 2011 March 31, 2011 GAAP   Excludes Non-GAAP   GAAP   Excludes Non-GAAP Revenue: Product $ 41,248 $ - $ 41,248 $ 114,387 $ - $ 114,387 Support and services   10,329     -     10,329     29,198     -     29,198   Total revenues 51,577 - 51,577 143,585 - 143,585 Cost of revenue Product 12,979 (207 ) (a), (c) 12,772 37,593 (410 ) (a), (c) 37,183 Support and services   3,515     (111 ) (a)   3,404     9,616     (472 ) (a)   9,144   Total cost of revenue   16,494     (318 )   16,176     47,209     (882 )   46,327   Gross profit 35,083 318 35,401 96,376 882 97,258 Gross profit % 68.0 % 68.6 % 67.1 % 67.7 %   Operating expenses: Research and development 12,562 (1,086 ) (a) 11,476 33,396 (2,688 ) (a) 30,708 Sales and marketing 18,920 (469 ) (a), (c) 18,451 54,437 (2,231 ) (a), (c) 52,206 General and administrative   6,377     (1,112 ) (a)   5,265     19,118     (3,311 ) (a), (b)   15,807   Total operating expenses   37,859     (2,667 )   35,192     106,951     (8,230 )   98,721   Income (loss) from operations (2,776 ) 2,985 209 (10,575 ) 9,112 (1,463 ) Other income, net   166     -     166     780     -     780   Income (loss) before provision for income tax (2,610 ) 2,985 375 (9,795 ) 9,112 (683 ) Provision for (benefit from) income tax   (228 )   1   (d)   (227 )   (77 )   1   (d)   (76 ) Net income (loss) $ (2,382 ) $ 2,984   $ 602   $ (9,718 ) $ 9,111   $ (607 ) Net income (loss) per share: Basic $ (0.05 ) $ 0.06   $ 0.01   $ (0.21 ) $ 0.20   $ (0.01 ) Diluted (e) $ (0.05 ) $ 0.06   $ 0.01   $ (0.21 ) $ 0.20   $ (0.01 )   Shares used in computing net loss per share: Basic   46,249     46,249     45,862     45,862   Diluted (e)   46,249     48,209     45,862     45,862       (a) Excludes stock-based compensation as follows: Cost of product revenue $ 32 $ 94 Cost of support and services revenue 111 472 Research and development 1,086 2,688 Sales and marketing 459 2,212 General and administrative   1,112     2,786   $ 2,800   $ 8,252     (b) Excludes severance for former Chief Executive Officer: General and administration $ -   $ 525     (c) Excludes amortization of acquisition-related intangibles: Cost of product revenue $ 175 $ 316 Sales and marketing   10     19   $ 185   $ 335     (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 Q4 PROJECTIONS (Amounts in thousands) (Unaudited)           Three Months Ending June 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 $ 51,000 Adjustments for stock-based compensation and acquisition-related intangible asset amortization (4,000)   (4,000) Total non-GAAP operating expenses $ 48,500 $ 47,000