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Why ShoreTel Inc. Rose 14% Friday

By Anders Bylund - Oct 23, 2015 at 5:57PM

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ShoreTel's robust first-quarter results ignited a strong market surge across the IP telephone sector.

Like a modern smartphone, these ShoreTel phones can do much more than basic voice calls. Image: ShoreTel.

What: Shares of ShoreTel (NASDAQ: SHOR) gained as much as 13.9% on Friday, thanks to a fantastic first-quarter report.

So what: In the first quarter of fiscal year 2016, ShoreTel saw sales hold steady year over year, at $90.2 million. Adjusted earnings increased 29%, to $0.09 per diluted share. Your average Wall Street analyst would have settled for earnings of $0.04 per share, though they did nail ShoreTel's top-line revenues exactly.

Looking ahead, the maker of IP-based phone systems and other networked communications solutions expects to deliver roughly $90 million in third-quarter sales. Do take note, however, that the guidance comes with a fairly wide margin of error, ranging from $87 million to $93 million.

Now what: ShoreTel is busy rolling out partner programs, and extending the capabilities of their core communications software. In the second quarter, most of the sales growth came from a suite of cloud-based calling platforms. So-called hosted sales jumped 19% year over year.

Adding some much-needed stability to ShoreTel's quarterly results, the company is also moving many of its customers over to long-term contracts. Today, 51% of ShoreTel's revenues come from these long-term agreements, a 15% improvement from the year-ago period.

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"We are now in the third and final phase of our strategic transformation and we continue to operate from a position of strength with momentum and accelerating results," said ShoreTel CEO Don Joos in a prepared statement.

Fellow IP telephony specialist 8x8 (EGHT 10.24%) also reported results on Thursday night, growing faster than ShoreTel, but only meeting and not beating Wall Street's targets. 8X8 shares rose as much as 8.5% on that report, and you almost have to believe that some of that jump came from ShoreTel's good news bleeding over into other IP-based telecom businesses.

Up next, Vonage Holdings (VG) will publish its quarterly results on November 2. With no news of its own today, Vonage shares still rose as much as 3.6% on Friday. In short, investors are treating ShoreTel like an industry bellwether.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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