ShoreTel Reports Financial Results for Second Quarter Fiscal Year 2014

27 Per Cent Cloud Revenue Growth Year-Over-Year; 9 Per Cent Premise Revenue Growth Year-Over-Year. End Quote

(1888PressRelease) January 24, 2014 - ShoreTel® (NASDAQ: SHOR), the leading provider of brilliantly simple phone systems and unified communications solutions, today announced financial results for the second quarter of its fiscal year 2014, which ended 31 December 2013.

For the second quarter of fiscal 2014, total revenue was US$84.5 million, an increase of 13 per cent compared to the second quarter of fiscal 2013. Non-GAAP net income, which excludes stock-based compensation charges, amortisation of acquisition-related intangibles, other charges and related tax adjustments, for the second quarter of fiscal year 2014, was US$3.2 million, or US$0.05 per share. This compares with a non-GAAP net loss of US$2.6 million, or US$0.04 per share, in the second quarter of fiscal 2013. GAAP net loss was US$0.9 million, or US$0.02 per share, in the second quarter of fiscal 2014, compared with a GAAP net loss of US$10.4 million, or US$0.18 per share, in the second quarter of fiscal 2013.

"The positive second quarter results validate the ongoing value of our business model which led to our revenue growth, non-GAAP profitability and significant cash flow from operations," said Don Joos, President and CEO of ShoreTel. "We have strategically positioned the company for the growth opportunities in our industry and we remain focused on executing key initiatives including our enhanced channel partner programme, sales team integration and product launches."

Second Quarter of Fiscal 2014 Financial Highlights

Recurring revenue, which consists of cloud monthly recurring revenue and premise support revenues, reached an annualised value of US$126 million; an increase of 20 per cent compared to the second quarter of fiscal 2013, and represented 37 per cent of total revenues in the second quarter of fiscal 2014.

Non-GAAP gross margin, which excludes stock-based compensation charges, amortisation of acquisition-related intangibles and other charges, for the second quarter of fiscal year 2014, was 60.7 per cent, compared with 61.8 per cent in the year-ago period. GAAP gross margin for the second quarter of fiscal year 2014 was 59.0 per cent, compared with 58.8 per cent in the second quarter of fiscal year 2013.

In the second quarter of fiscal 2014 the company generated free cash flow of US$7.3 million consisting of US$13.5 million in cash flow from operations less US$6.2 million of capital expenditures. The company reduced its debt obligations down to US$9 million and had US$57.3 million in cash, cash equivalents and short-term investments as of 31 December 2013.

Line of Business Results

ShoreTel Sky

ShoreTel Sky hosted revenues of US$21.7 million were up 27 per cent year-over-year and 5 per cent sequentially. Non-GAAP gross margins on hosted revenue were 39.8 per cent in the second quarter of fiscal 2014, compared with 43.3 per cent in the second quarter of fiscal 2013. The total number of installed customer seats increased 40 per cent over the second quarter of fiscal 2013 to approximately 136,000. Annualised revenue churn remained slightly below 4 per cent.

Premise Business

Premise revenues of US$62.8 million were up 9 per cent year-over-year and down 1 per cent sequentially. Product revenues growth accelerated to 6 per cent year-over-year and Support and Services revenues grew 18 per cent year-over-year. Non-GAAP gross margins in the premise business were 67.9 per cent in the second quarter of fiscal 2014, compared with 67.3 per cent in the second quarter of fiscal 2013.

Selected Operational Metrics

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Business Highlights

ShoreTel Launches Enhancements to Its Channel Partner Programme

In January, ShoreTel launched its enhancements to its channel partner programme. Under the programme many of ShoreTel's existing channel partners and new cloud partners complete product education and sales training related to ShoreTel's Sky products to prepare them to identify opportunities and sell ShoreTel's cloud solutions. Many partners also make commitments to achieve certain sales targets under agreed upon compensation plans.

The programme is leveraging ShoreTel's experience with its mature channel partner network to attract customers that are larger and have more complex unified communications needs.

ShoreTel Integrates Its Cloud and Premise Sales Teams

In January, ShoreTel integrated its cloud and premise sales teams. In addition, certain members of the sales team now carry a cloud sales quota which is incremental to their premise quota. The increased coordination of the sales team and ShoreTel's channel partners further improves ShoreTel's ability to solve the unified communications needs of the company's total addressable market.

ShoreTel Appoints Mark Roberts as Chief Marketing Officer

In December, ShoreTel appointed Mark Roberts to be its new chief marketing officer. Roberts has more than 20 years of technology marketing experience and brings strong technology, channel and unified communications expertise to ShoreTel. As such, Roberts' background is complementary to ShoreTel's strategic direction and growth initiatives, and he will play an instrumental role in executing the company's plans. As ShoreTel's CMO, Roberts will lead the overall marketing strategy, product marketing, demand generation, branding and external communications.

ShoreTel Continues to Demonstrate Its Industry Leadership and World Class Customer Service

ShoreTel's focus on its customers' primary needs was recognised by Frost & Sullivan, which named ShoreTel as North America's "Company of the Year for Unified Communications and Collaboration". The report cites ShoreTel's ability to help its customers improve productivity and accelerate business processes as catalysts for long-term and sustainable growth.

ShoreTel's analytic research indicates that its customers who have received the best customer experience spend at twice the level as other customers. For the six months ending 31 December 2013, ShoreTel once again earned a Net Promoter Score above the world class threshold.

Business Outlook

ShoreTel is providing the following outlook for its fiscal third quarter of 2014 ending 31 March 2014:

• Revenue is expected to be in the range of US$80 million to US$85 million.

• GAAP gross margin is expected to be in the range of 59 per cent to 60 per cent. Non-GAAP gross margin, which excludes approximately US$1.4 million in stock-based compensation charges, amortisation of acquisition-related intangibles and other charges, is expected to be in the range of 61 per cent to 62 per cent.

• GAAP operating expenses are expected to be in the range of US$50.5 million to US$51.5 million. Non-GAAP operating expenses, which excludes approximately US$2.5 million in stock-based compensation charges, amortisation of acquisition-related intangibles and other charges are expected to be in the range of US$48 million to US$49 million.

Conference Call Information

The Company hosted a corresponding conference call and live webcast at 2:00 p.m. Pacific Time on Thursday, 23 January 2014. An audio telephonic replay of the conference call will is available now until 31 January 2014 by dialling +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 10039017.

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 amortisation 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 harbour" provisions of the federal securities laws, including, without limitation, statements by Don Joos, statements regarding future growth 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 intense competition in our industry, our reliance on third parties to sell and support our products, our ability to continue to grow our ShoreTel Sky business, market acceptance of cloud-based products, our ability to maintain our premise business in a profitable manner, supply and manufacturing risks, our ability to control costs as we expand our business, our ability to attract, retain and ramp new sales personnel, potentially longer sales cycles, uncertainties inherent in the product development cycle, 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 30 June 2013, and in its Form 10-Q for the quarter ended 30 September 2013.

Related Links & Conversation

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• Read ShoreTel Customer Success Stories.
• Bookmark this Unified Communications Glossary.
• #ShoreTel, #UC.

About ShoreTel
ShoreTel, Inc. (NASDAQ: SHOR) is a leading provider of brilliantly simple IP phone systems and unified communications solutions. Its award-winning on-premises IP-PBX solution and cloud-based hosted phone system eliminate complexity 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.

ShoreTel, ShoreTel Sky and the ShoreTel logo are trademarks or registered trademarks of ShoreTel, Inc. in the United States and/or other countries. All other trademarks, trade names and service marks herein are the property of their respective owners.

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Condensed Consolidated Balance Sheets

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Condensed Consolidated Statements of Operations

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GAAP to Non-GAAP Reconciliation

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GAAP to Non-GAAP Reconciliation Footnote

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Reconciliation of GAAP to Non-GAAP for Q3 Projections

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