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ShoreTel Dials for Dollars

On his first conference call since ShoreTel's (Nasdaq: SHOR  ) IPO in early July, CEO John Combs ended his prepared remarks with a sales pitch. He said: "I'd like to invite each of you to explore the ShoreTel communications system for your business." He provided his website address and even the toll-free number. While I've never heard such an attempt on an earnings call, I have to admire it. In fact, I'm starting to understand why ShoreTel keeps ramping up revenues.

For about a decade, ShoreTel has developed Internet Protocol, or IP, telecommunications systems for enterprises. It's a highly competitive business -- with rivals like Cisco (Nasdaq: CSCO  ) , Alcatel-Lucent (NYSE: ALU  ) , and Avaya (NYSE: AV  ) -- but the company has demonstrated that it can thrive in the environment.

In fiscal Q4, revenues surged 52% to $28.9 million and net income was up 11% to $1.9 million, or $0.05 per share. This was the case despite a $632,000 stock compensation charge, new public company costs, and increases in R&D expenditures.

The spike in revenues also helped with gross margins, which increased to 64% from 60% over the past year.

Combs spent lots of time on the conference call talking about ShoreTel's channel strategy. No doubt, the company is quite methodical about its approach and knows how to structure arrangements that incentivize partners. Some of the recent major distributors include CDW (Nasdaq: CDWC  ) and Black Box (Nasdaq: BBOX  ) .

For the next year, management pegs growth at a healthy 40%-45% rate and gross margins at 62%-64%. A nice boost will come from a slew of new products, such as ShoreTel 7.

Unfortunately, the company is in the midst of a patent infringement lawsuit from Mitel Networks. Such matters are complex and a drain on resources. In fact, we are likely to see a ramp in legal expenses for ShoreTel. After all, the company recently filed counterclaims against Mitel for infringement of a ShoreTel patent.

So while the company has had an impressive start as a public firm and has a solid product offering, I still think the litigation may weigh on the stock.


Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 4,317 out of 34,192 in CAPS.

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