Good afternoon, ladies and gentlemen, and welcome to the Extreme Networks fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, August 2nd of 2006. I would like to turn the conference over to Bill Slakey, Chief Financial Officer with Extreme Networks. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us. On the call with me today is Gordon Stitt, President and CEO of Extreme Networks. This afternoon, we issued a press release announcing our financial results for Q4 of FY2006. A copy of this release is available on our website at extremenetworks.com. This call is being broadcast live over the Internet today and it will be posted on our website and available for replay shortly after the conclusion of the call. Let me note that some of the remarks made during this call may contain forward-looking statements about financial and business guidance, product introduction, customer development and prospective real estate transaction. These reflect the company's current judgment on these issues. Because such statements deal with future events, they are subject to risks and uncertainties that could cause the actual results to differ materially. In addition to the factors that may be discussed during this call, important factors that could cause actual results to differ materially are contained in the company's Form 10-Q and 10-K, which are on file with the SEC and available on our website. With that, let me turn the call over to Gordon.

Thank you, Bill, and thanks, everyone, for joining us. I would also like to welcome Mike Palu to the call. Mike will take over as acting Chief Financial Officer at Extreme starting next week. I will begin this call with a summary of the financial results, review some quarterly highlights, and then spend a few minutes talking about our strategy. Bill will then follow with a detailed discussion on our financials. Net revenue for the quarter was $82.4 million, and net loss for the quarter was $1.8 million, or $0.02 per diluted share on a GAAP basis. Excluding stock-based compensation expense of $2.2 million, non-GAAP net income for the quarter was $400,000, or less than $0.01 per diluted share. Let's just call that breakeven. This is a decline from the $0.03 per diluted share on a non-GAAP basis in the March quarter. As you know, during the first quarter of this fiscal year, we announced a $50 million stock repurchase program. During the last three quarters, we have repurchased $33.7 million in stock cumulative to date. We are executing to our internal plan and will continue to do so going forward. Bookings during the quarter were strong, with a book-to-bill higher than one. Unfortunately, we missed some shipments late in the quarter due to product constraints. Japan business continued to be sluggish this quarter. We have seen similar comments from other networking companies but nonetheless, we are disappointed. That was the bad news. The good news is that we saw strengthening demand for our modular product lines, BlackDiamond 8800, the new BlackDiamond 12K and the BlackDiamond 10K product lines. In fact, this demand exceeded our ability to produce within the quarter, and this created the majority of our product constraints. Much of the strong demand for the BlackDiamond 12K came…

Thank you, Gordon. I am going to briefly review our financial results for the quarter, and then provide you with some of our current thoughts regarding future performance. This was a quarter in which revenues were lower than we might all have expected, given our typical seasonality. However, it was also a quarter in which we saw further sequential improvements in our U.S. sales and finished a year of good growth overall in our European operations and our Asia-Pacific operations. We also began to increase the size of our sales force and marketing spending, which we believe will be an important part of improving our revenue growth in future quarters. On the balance sheet, cash generated from operations was slightly ahead of profitability, and we continued our share repurchase program. We have now repurchased 5.8% of the shares that were outstanding when we announced the program in October. Let's look first at revenue. Revenue for the quarter was $82.4 million, consisting of $66.8 million in product revenue and $15.7 million in service revenue. Our book-to-bill was above one. Our backlog of product orders increased during the quarter, compared to Q3, as did our deferred revenue balances. Services revenues were up 1% compared to the year-ago quarter and down 4% sequentially. Product revenue decreased 3% sequentially and 17% year over year. Shipment of modular products represented 44% of sales, with stackables representing 56%, consistent with the mix in Q3. The split of enterprise sales and service provider sales was 78% to 22%, a slight shift towards enterprise business for the quarter. This is consistent with the stronger U.S. sales, which is typically a more enterprise-centric geography. Bookings of XOS-based products continued to increase as a percentage of our total revenue. All told, sales of XOS products represented in excess of 30%…

Thank you, Bill. To conclude, I wanted to thank our team of very dedicated employees here for their hard work during the past year. This has been a challenging time, but you have performed magnificently and positioned us for success during this new year. As this is Bill Slakey's last call with us as CFO, I would like to thank Bill for his contributions to Extreme and for his tireless efforts towards our success. Speaking for the team here and for the Board, we all wish him the very best in his future endeavors. With that, I would like to open the call to questions.

Good afternoon. This is Jeff Hubert dialing in for Tim. A couple of questions. On the product revenues, weak again sequentially. Would product revenues have been up without the push-outs? Are these deals now closed?

Yes, potentially, product revenues would have been up without the constraints. The deals were closed last quarter. We were simply constrained on products, particularly in Europe.

So that should be fulfilled this quarter?

Yes, sir.

Then, on the supply issues, were those at EMS or were they more at the component level?

A little bit of both, somewhat related to the environmental regulations and component changeovers that were happening across the space during June.

But those issues are resolved now?

They will be resolved this quarter.

Still a little bit of carryover?

Yes, but we expect them to be taken care of shortly.

Last question, obviously with some major management changes, were there any sales force retention issues and changes in the quota-carrying sales force? What are you doing to make sure your quota-carrying sales force stays with Extreme and remains loyal during these transition days?

First of all, there are some management transitions but as I noted, I am not leaving the company, just taking a different position. I think that is important for all of our employees, who understand that. Secondly, if you look at the Americas, where we have had the most attrition during the last several quarters, we were very aggressive in our hiring during the June quarter. We brought on a lot of folks. We began this quarter, the September quarter, with a full team in place and with a new VP of Sales for the Americas. If you look at that, we are starting off the year very, very strong, and our plans are to continue to hire within the Americas and to grow that sales force, given where we are with product and momentum.

Thank you.

Thank you. We are going to try and keep the questions limited to one per analyst, just to make sure we can get through everyone. Next question, please.

Thank you. The next question is from Samuel Wilson with JMP Securities. Please go ahead.

Good afternoon, gentlemen. A question and a clarification. First, a clarification -- based on last quarter's product sales, and what you did this quarter, it was at least a $3 million to $4 million deferral, or was it greater than that?

I do not want to put a specific figure on the deferral, or the constraints because there is a lot of moving parts there. Bookings were up and we had more revenue than we could ship, and we have it in backlog for this quarter.

Sure, but your revenues were down significantly. You could have been down in revenues and still had bookings above. Do you think if you would not have had the constraints, would you have met Wall Street estimates of $88 million for revenue?

Not necessarily, no.

Then, my question -- can you just give us an update on how OEM sales are going for the products you launched at NetWorld and Interop, or Interop, or whatever it is called this year -- you know, the security stuff?

I am sorry, Sam, I am not sure what you mean by OEM. You mean the security products?

Yes, the security products and then the relationship with ISSX and those things.

The relationship with ISS, we did not expect to have revenue during this past quarter, or even in the September quarter because there is joint development going on there, but that development is progressing and that is moving ahead towards our expectations.

Then on the rest of the other products you announced?

The other products, our Sentriant, original Sentriant, continues to sell well and the Sentriant AG is just launching and shipping this quarter.

Thank you very much.

Thank you, Sam. Next question, please.

Thank you. The next question is from Subu Subrahmanyan with Sanders Morris Harris. Please go ahead.

Thank you. My question is on your hiring plans. You talked about having a full team now. Where the focus is going to be on hiring, any particular geographies that you are going to focus more in terms of hiring? When do you expect to be done and start seeing the benefits of that hiring in terms of revenues?

I do not think we will ever be done. If things are going well, we will continue to hire sales reps. Your question in terms of where our focus is, is primarily in the U.S. and North America, and then also in EMEA. The U.S. has been a disappointment to us over the last year, with the exception of the last two quarters where we have seen an increase in sales, but we have really regained a lot of confidence in our local home market here. As I said, we enter the quarter with a full team in place with all slots filled, and we began the quarter by opening up additional positions which will allow us to open up in cities where we did not have a presence, and also increase our density of sales reps and systems engineers in some of the existing cities.

I was trying to figure out, when the op-ex ramp starts to kind of tail off, and when will be kind of in a more steady-ish op-ex kind of environment?

Particularly again focused on the sales area, we expect that we are aggressively hiring this quarter to have people in place as early in the year as possible. Then it will taper off as we move into the December quarter, in terms of the increase.

You expect the benefits more in early calendar '07 from these hires?

We expect some near-term benefits, particularly as we put people into existing regions. Where we have some regions -- for example, today where we might have one or two reps and they are running full out, but we have an installed customer base, so putting reps into those cities should bring a fairly near-term benefit. As we open up new territories, that generally is more of a six-month window to get sales moving.

Thank you.

Thank you. Next question, please.

Thank you. The next question is from Jiong Shao with Lehman Brothers. Please go ahead.

Thank you very much. I actually have a question with two parts, obviously they are related. The first part is, other than the supply constraint, it sounds like due to RoHS, did you see any changing demand towards the end of the quarter? Do you see any slowdown or not? Then, extrapolate that to the next quarter. If I look at the last three years, your September quarter was either flat or up a couple of percent. You already mentioned that it is seasonally the toughest quarter, but this year you have some push-out orders from the June quarter. Just directionally, how should we think about that? Should we think about likely to be down, slightly up a little bit like in past quarters? Thank you.

Again, we do not want to get into giving guidance for any particular quarter. On the plus side, from a revenue and a bookings standpoint, we will have a larger sales force going after orders. We will enter the quarter with some amount of backlog, a larger backlog than we entered the last quarter. Those would be some of the important positives, along with some of our new products availability and 12K. On the downside to that, typically the seasonal patterns would be somewhat weaker on an ongoing bookings basis, but I am going to leave it to you to decide exactly how to calibrate that in your model.

Okay, sure. The first part?

Regarding linearity or demand through the quarter?

No, the demand toward the end of the quarter. Did you see any softening in demand in the month of June or towards the second half of June?

No, with 50% of our business done the last month of a quarter, which is very typical and was typical this last quarter, that last month usually looks pretty good to us, and it was the case this time around.

Next question, please.

Thank you. The next question is from Tal Liani with Merrill Lynch. Please go ahead.

I want to ask about the history, actually, not the outlook. Your revenue this quarter is down to levels that we have only seen, I think, lower than this level was only March of 2000. Throughout the difficult years of the industry, you maintained over $82 million of revenue. If you look at the last three quarters, you had sequentially down revenues, both on a sequential basis and a year-over-year basis, but your commentary is very positive, which is confusing me, given the negative trends we have seen in the last three quarters. Can you go back and look at the fiscal '05, fiscal '06 -- what led to this decline in revenues almost every quarter? What led to the step-down from $95 million to $100 million of revenues per quarter to $82 million to $85 million per quarter? Why didn't we see better revenues, given that you did have product cycles and you did invest in sales and new channels before that?

Going through the '05 to the '06 comparisons, I think there are two things that stand out to me. One is that we did grow our business in Europe 6% year over year, we did grow our business in Asia 25% year over year. Japan has been a real problem spot for us. Those revenues have come down to the point now where there is $5 million to almost $10 million less in quarterly revenue there for us, and for a company our size, that takes a lot out of the growth rate. Now, looking forward, how do we expect to improve on that? An awful lot of that comes down to capturing some portion of the next generation networks that are going to roll out there on the service provider side, and doing what we can to expand our enterprise business there. Obviously we have not had the success on those fronts that we had hoped over the last two quarters, but that remains the plan, and I think we are getting closer to hopefully seeing some improvement there. Then, the second issue that hit us was the U.S. business in the December quarter of this year fell off unexpectedly, and Gordon has taken you through some of the steps that we are taking to address that. I think there we are starting to see some apparent visible in the financial results, tangible results from those efforts. Revenues are starting to grow again in the U.S. We have product cycles that can help there, and now we will have an expanded sales force and new sales leadership, all of which I think can get us back on track in the U.S. The '05 to '06 comparisons are in large part problems in Japan, somewhat less problems in the U.S. Going forward, we are trying to address both those things as well as keep Europe and Asia on track.

Just to echo some of Bill's comments, because I think your question is an important one. If you look at the decline in Japan and you look at us overall, managing these four major geographies, when we have seen the decline there, which is heavily influenced by a carrier pause, and we have certainly heard this from other companies in this space, but because that was such an important part of our business two years ago, it has had a big impact. If you just think of it, that is a big hole to fill with growth from other regions. As Bill mentioned, Europe has grown, but the combination of Japan falling off and then some missteps in the U.S. really hurt. I do believe we have the U.S. poised for a strong rebound here. We have a full team in place. We have a new Vice President in place, and last year, last calendar year particularly, we experienced a lot of turnover. If I look back, we had a lot of people on our sales force who had been on board for a long time. We kind of hit the natural half-life of salespeople. We brought on a lot of new folks, a lot of energy in our organization here in the U.S., in Europe and in Asia as well. As you bring in new people, they really help energize the whole team. That is one of the reasons that I for one see I have a lot of optimism looking forward.

What has been the historical relationship between new product launches and revenues? Have you seen in the past rapid correlation or rapid impact on sales, or has it been slower sort of impact?

There are two factors that are linked to revenue. One is, let's call it sales headcount, in that the more salespeople you have, the more sales you will get. The challenge there is the one of productivity. I think as we look back over the last couple of years, we can see our sales productivity vary at different points in the product cycle. If you look at where we are today, we have spent the last two years really refreshing our enterprise product cycle. With the new Aspen blades and the new Jaguar stackables, we have revamped the bulk of the middle of our product line in enterprise, and I think that, combined with a lot of the convergence features, should help sales productivity in that we have added a lot of stuff, a lot of features that gives them tools to sell, so I think that should help. Carrier productivity is a bit more difficult to predict and plan for, given the buying cycles of carriers. As Bill noted, there was a shift, enterprise grew a little more rapidly. As I mentioned in my prepared comments, we are seeing a transition in the metro ethernet carrier space going from what I will call the first generation, which was a best efforts with quality of service, and that has been a five-, call it six-year, seven-year run now. It has been a great run for us and for other players, but the carriers have saturated that market, if you will, and the new market is the triple-play market. That is requiring more planning. It is a more complex network environment. Although I could not prove this to you with numbers, I inherently feel and believe that we will see that market start to rapidly grow once the first few networks get deployed. So we are in of that low productivity sales cycle with metro, where we are going through trials and getting it in front of the customers. Once they start to deploy, I believe sales productivity will go up.

Let's move on to the next question, please.

Thank you. The next question is from Long Jiong with UBS. Please go ahead.

My question is related to your 12,000 carrier switch. A while back, you mentioned that you are targeting ramp-up in this segment in the second half of this year. Based on the progress so far, do you think you are on track towards a second half ramp-up for this segment? Related to that, for the ongoing bids that you are competing, what does the average deal size look like? Can you give us some color on that? I know the bidding process is highly competitive. Do you think gross margin for service provider ethernet, how high does it compare to your enterprise modular switching product segment? That would be great. Thank you.

I think there are about a dozen questions in there. Some of them are very difficult to answer, because we do not have the results yet. We do not have the numbers to say that. I would say the business though breaks down into two general segments, and that is taking the carrier business. There are some very large carrier customers. Those deals do tend to be very competitive. They do tend to take a while, in terms of the initial lab trials and then field trials and then final selection. Those deals do tend to be competitive. There are a lot of other carriers that are more of what I will call the mid-tier. We talked about one in the prepared comments in terms of T2 in Slovenia -- a great customer for us, a good bit of revenue, but not gigantic. There is a mix of the mid-sized carriers, and particularly in emerging markets, and then the very large carriers that are in more established markets. We have a lot of the mid-sized customers that have deployed the 12K technology. We are in discussions and trials with some big guys.

Next question, please.

Thank you. The next question is from Manny Recarey with Kaufman Brothers. Please go ahead.

Thank you. Good afternoon. My question is, looking at the operating profit, excluding stock-based compensation, I think it is a loss of $1.7 million. Revenue in the September quarter is going to be I assume somewhere plus or minus a little bit of what was in the June quarter. Your op-ex is going to be higher. Are you expecting any improvement on the operating income line? When do you think you will be able to return back to an operating profit?

Again, we do not want to get into guidance regarding next quarter or the quarter after that. As Gordon mentioned, we will not be shy here about hiring on the sales team and spending something on marketing to get demand going, and spend some of that money first, with the anticipation that revenues will follow. Exactly how fast revenues follow will go a long way towards determining where we are profitable and when we are profitable and how much we are profitable by. For right now, we are not going to give any guidance as to levels of profitability or non-profitability going forward.

Thank you. The next question is from Mark Sue with RBC Capital Management. Please go ahead.

This is Jennifer Tannenbaum for Mark. Just a question on Japan -- you changed management there about a year ago and I think you had one or quarters there of sequential growth, and then it kind of dropped off. Just wondering if you are thinking about making any more changes there in the management or the sales team in Japan.

We have a good organization in Japan. I think we have seen from a number of networking companies that, you know, that market has been pretty rough for them. We have seen that from some companies that are partners and some that are competitors. There has been a pause in carrier spending as the Japan market figures out how it is going to implement its next generation network. Unfortunately, there is not a lot that the team can do about that. We are certainly working very closely with our existing customers there and with new customers. Once the decisions are made on these carrier build-outs, I think we will have a lot of information about our future success there.

So it is not really on the enterprise level then at all in Japan, or a little bit, a mix?

A lot of the drop-off in Japan has come from the carrier build-outs.

Thank you, Jennifer. Next question, please.

Thank you. The next question is from Eric Suppiger with Pacific Growth Equities. Please go ahead.

First off, just in terms of the CEO search, do you have any projections as to when that might be done? Secondly, I would be curious, in terms of Japan and the pause that you were referring to, do you have any expectations as to when we might start seeing the build-out of the next generation networks there?

Boy, Eric, you asked the two tough questions which result in pure speculation on my part. On the CEO search, that is very difficult to give a date. I can tell you that we -- and that is our search committee, of which I am a member -- have spent a lot of time in the last several months working on this. We have been at this for three-and-a-half months. We have screened literally dozens and dozens of folks, and had extensive interviews with a smaller number. As I said, I am really pleased with the caliber of people. I think what we have seen in the industry through consolidation and change has resulted in a lot of just terrific executives being available in the marketplace. We have had the opportunity, quite frankly, to be choosey, but the negotiations with people are time consuming, so I do not want to speculate, other than that we have put a lot of effort and hours into this and we want to make it happen soon. On Japan, I think some of the directions will be set. I will just say during the summer here. As soon as we learn anything, we will make sure to let you know.

Next question, please.

Thank you. The next question is from Alex Henderson with Citigroup. Please go ahead.

I have a couple of quick questions that are actually more clarifications. First off, what exactly is the timing that you are expecting on the sale of the headquarters?

It is contingent upon re-zoning, which is a difficult process to predict entirely. For that reason, we are putting a six-month window on it, call it the second half of next calendar year, calendar 2007.

Second half, calendar. What did you say the moving cost was going to look like when you finally do sell it and need to move out?

I don't think we have said to date, but I would anticipate it would be somewhere in the area of $10 million to $15 million to move out and refit new building.

So the net cash increase would be what?

Under that scenario, the net cash increase would be $55 million or more.

$55 million. Second, what was the ending share count? I know the average share count for the quarter, but what was the actual ending share count given you were buying back stock?

Yes, it was 117.3 million.

The other question was, the legal expense comment, you were implying that your legal expense is increasing. Can you give us some sense of the magnitude and duration of that increase?

Well, we have a number of legal issues that we disclosed in our 10-K, primarily IP related. A fair number of those are going to come to a head here in the next 12 months. They're difficult to predict. Sometimes they result in settlements, sometimes they result in ongoing legal expenses, sometimes they result in trials. But on balance, Alex, there are enough of them coming to a head in the next 12 months that we need to flag for investors our legal expenses are going to be increasing. They will be a bit lumpy.

Are we talking $100,000 a quarter, or $0.5 million a quarter, $3 million a quarter, I mean any, just give us a rough zoning of that?

You bet. We're not talking $100,000, we're talking $500,000 to $1 million and potentially more if things go to trial in a particular quarter.

And so maybe $0.5 million in an off quarter and $1 million in a heavy quarter?

We'll just have to see.

I'm just trying to understand how to think about it so I mean we've got to model this stuff, right?

Yes, you do. Model it nearer $1 million than $100,000. How's that?

This one's a little bit more of a technical question with respect to your carrier business. A lot of companies when they enter large new carrier environments find that they are putting technology in place that goes against new applications. Those new applications force some performance criteria on the deployments. Are you anticipating software accounting rules to kick in, resulting in you having extended revenue deferral timing on some of these larger customers that you might be going after?

Well, right now, of course, we follow the same revenue recognition we've been following for some time. We do look at revenue recognition and will continue to look at it. Right now, I expect we'll continue to follow our existing policies for the next generation rollout, but as you can imagine -- and Alex you went right through the issues -- increasingly as software becomes a bigger part of what you do, you have to examine and re-examine your rev rec on an ongoing basis.

Just one final comment there. Certainly, there are some companies that sell into that market where there's large deferrals due to qualification by the customer and we haven't seen that in the past. In general, we do a lot of the work upfront before the orders come in, before the shipments are made. So for example, for some of the customers that we're working with in trials today, we've been doing software development for 12 months and hardware development as well for some special features for them. So we tend to do that upfront.

One last comment. Thanks for your time and efforts at Extreme, Bill. Good luck in your new endeavors.

Thank you. I appreciate that.

Operator, I believe we are finished with the Q&A. With that, I'd like to thank everybody for their time on this call. Again, I'd like to thank Bill for his contributions and to welcome Mike Palu here into the hot seat. Thank you very much, everyone.

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. (Operator Instructions) You may now disconnect.