Good day, ladies and gentlemen, and welcome to your Extreme Networks Fiscal Q2 2012 Financial Results Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now I would like to introduce your host for today, Jim Judson.

Thank you, John. Welcome to the Extreme Networks 2012 Second Quarter Conference Call. [Operator Instructions] On the call today for Extreme Networks are Oscar Rodriguez, President and CEO; and myself, Jim Judson, the Interim CFO. As a reminder, this conference is being recorded today, February 2, 2012. This afternoon, Extreme Networks issued a press release announcing the company's financial results for the second quarter of fiscal 2012. A copy of this release and a slide presentation of the supporting financial materials are available in the Investor Relations section of the company's website at www.extremenetworks.com. This call is being broadcast live over the Internet and will be posted on the Extreme Networks' website for replay shortly after the conclusion of the call. Extreme Networks wants to remind you that this conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding the company's expectations regarding its financial performance, strategies, growth of customer demand, development of new products, customer acceptance of the company's products, customer buying and spending patterns, overall trends and economic conditions in the company's markets. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors including, but not limited to, a challenging macroeconomic environment worldwide, fluctuations in demand for the company's products and services, a highly competitive business environment for network switching equipment, the company's effectiveness in controlling expenses, including the company's cost restructuring efforts, the possibility that the company might experience delays in the development of new technologies and products, customer response to its new technology and products, the timing of any recovery in the global economy, risks related to pending or future litigation and the dependency on third parties for certain components and for the manufacturing of the company's products. The company undertakes no obligation to…

Thank you, Jim, and I want to thank all of our investors for joining this call. As we've discussed in past investor calls, we have been in the process of transforming Extreme over the calendar year 2011. We have focused on restructuring our business towards the goal of consistently achieving double-digit operating income without the need for significant revenue growth. We have aligned our resources to deliver high customer value through innovation, and we have focused our marketing to derive revenues from some of the highest growth, multi-billion-dollar verticals in the communications market. I am pleased to report that our major cost restructuring activities are now behind us, and we are delivering what we believe is a best-of-breed product portfolio that is designed to position Extreme as a leading competitor in these targeted vertical markets. We expect to deliver an expanded portfolio of mobility in cloud solution products in this quarter, and we also will begin shipping these products that are designed to more effectively address the competitive campus access market. With this new product portfolio, we will now focus on driving growth in both revenue and market share. Overall, we expect revenue growth to provide increasing leverage to the bottom line and increasing free cash flow. We are now focused on driving our vertical market strategy, which is targeted at data center cloud customers, the education market and mobile carriers. We will continue to see increased revenue and customer traction in these verticals, and we expect to see higher revenue growth for these verticals as we deliver new product portfolios. At the end of Q2, we shipped the first BlackDiamond X8 switch products as a part of our open fabric architecture for cloud networks to beta customers in North America, Europe and China. These beta customers represent a wide…

Thank you, Oscar. As I mentioned at the start of the call, we have essentially completed the cost restructuring of the company that we initiated in Q3 of FY '11. We'll continue to focus on prudently taking costs out of our operations and improving efficiencies as we move forward. However, our major focus now shifts to driving increased revenue and expanding market share. We believe that success of our new products and our vertical market focus will help the company further expand margins. At this time, we believe we have the products beginning to ship in Q3 and the basic cost structure in place for delivering our objective of double-digit operating income on a consistent basis. Fiscal Q3 tends to be a seasonally flat to down quarter for revenue. As such, we expect revenue for the third quarter to be in the range of $80 million to $85 million and EPS in the range of $0.06 to $0.08 per share. For the full year, we are maintaining our previous guidance for revenue and EPS. With that, we'll open the call for questions. John, please start the pooling.

[Operator Instructions] And we'll take our first question coming from Jonathan Kees from Capstone.

What I would like to do, if it's okay with you guys, is first start with some simple housekeeping questions, some quick ones there. And then move on to some higher-level questions. So with the housekeeping questions, if I can ask where the stackables versus chassis, the break-out there? The percentage of revenue for the rolling 4 quarters for the verticals and the book-to-bill.

Okay, let me start with the verticals, and we'll look up the stackables versus chassis. It's not really something we've been tracking as we had in the past. Jonathan, I think one of the things that we're trying to do is start tracking our verticals more. So our verticals were, on a rolling 4 quarter basis, approximately 28%, just under the 30%. We think this is ebbing and flowing until we get our new products online.

And Jonathan, the percent of stackables was 80% and chassis were 20%.

Great, okay. And book-to-bill please?

We haven't been given a book-to-bill.

Okay, all right, okay. And then the number of 10% customers for the quarter?

So it was one, and it was Westcon, right?

Yes, okay.

All right, great. Now to the other set of questions. The BD X8 that's available now, the G4E, that's end of the March quarter or, I guess -- yes, the March quarter. You're looking for these new products to become material contributors to revenue by Q4 of fiscal 2012?

Yes. Jonathan, let me clarify. So both the E4G family and the BD X8 will be available simultaneously because they will be coterminous with the release of our 15-1 software load which enables both of those product families. So there'll be effectively GA at the same time. We're expecting -- so the BD X8 is not available yet and the E4G -- both the E4G and the BD X8 will be available this quarter for G&A. Okay? Just wanted to clarify that but -- and then to go on to the next part of your question, yes, we do expect revenue for the BD X8 and E4G in Q4. We also expect that we may see some of that -- a little bit of that in Q3.

And do you anticipate then becoming material contributors by Q4, or it's still a little bit too early?

I think it's a little bit early to tell. We do have a growing pipeline for both, so how big that will be, I think it's really too early to tell. But Q4 will be the first quarter that we have a full quarter of those products being available.

Okay, all right. Then let me ask you about the macro conditions. You talked about some of the orders getting lumpy. You talked about the ordering process for like EMEA being extended, but EMEA proved -- should be approving for next quarter -- or actually, for March quarter. Are you seeing a change in macro conditions? Have you gotten more cautious? Have you gotten worse, or has it stayed the same since last time we spoke on the earnings call?

So I think we have to take it sort of customer type by customer type. Clearly, in the service provider CapEx space, there's been a lot of other discussions by other vendors as well where we've seen some of the service provider -- some dampening in the service provider CapEx space. So hence, we saw some of our mobility products less in Q2 than what we expected to see at the beginning of Q2, okay? So in that particular part of the markets that we serve, I think that, that's a little more damp, and it's yet to be seen how that recovers within Q3 and going into Q4. So I think that's something we're watching very carefully. When it comes to the enterprise space, you can see, we've done quite nicely in North America. A lot of that is enterprise, and so what we're seeing North America enterprise still continued to be good for us. Of course, we've got seasonal adjustments and all those things that go with it, as Jim indicated, but I think that the enterprise business in North America and even the enterprise business in parts of Asia are still very good. Europe, we planned for Europe to be down in certain parts. So as Jim indicated, we don't think we're going to see further softening because we planned for it. So we could always be surprised. Macroeconomics are what they are, they're somewhat unpredictable. So we're watching that very carefully. Jim, I don't know if there's anything else you want to add to that?

No, I was just going to maybe add that we are seeing a very good pipeline of larger deals in EMEA in particular. But they're slow to actually reach a buying decision.

Yes, I think there's a few other things going on here. Especially when we're talking about the cloud type of players. The cloud players are the kind of folks that have usually larger deal sizes. When they have larger deal sizes and it's an early market with a lot of competing opinions as to what fabric is the best fabric, et cetera. They take their time around testing, investigating, et cetera, and it has a tendency to lengthen the sales cycle early on. So I'm expecting that, that's going to continue for a short while, probably into -- further into calendar 2012 which would be even our fiscal 2013, early fiscal 2013, but then as the cloud operators and cloud deployers begin to get more confidence in what they're buying, then I think those sales cycles will start to contract a bit. There is investment going into that area, so we don't see it as an issue of budgets or investment. We really see it as an issue of customer decision-making from a technical standpoint.

Okay, all right. That helps. All right, that helps a lot. So about ASPs, is it fair to say that they're going down? You talked about, Oscar, that you sold a lot of ports in the quarter, more ports than a -- or a higher level of ports. So does that imply that your -- competitor pricing is still pretty tough out there, or has it gotten worse?

I don't know if it's gotten worse. I think it's been like that where we shipped more ports in the quarter than the revenue that would have been associated with it, let's say, a year ago, right, because they are -- and you can see this in third-party reports like Dell'Oro where you see the ASPs do drop. We see -- we don't see it every quarter. We see it discounting, getting a little more aggressive depending on what our competitors do and depending on customer budgets, et cetera. And then so it's somewhat -- I don't want to say the word lumpy, but it's somewhat like a bit of a roller coaster where it will come down, then it will flatten a bit, then come down and flatten a bit. So that -- it's kind of a bit of a stairstep, I guess, I should say. Jim?

Yes. I have to say it really -- it's dependent for us on how many big strategic deals we may have during the quarter. So it -- to Oscar's point, it does appear to be a little bit of a roller coaster. I would -- I guess would say looking at the numbers, there doesn't appear to be any sort of dramatic change in the pricing environment similar to what we saw like a year ago in Q3 time frame.

Yes. I don't think it's more aggressive. I think it's just equally aggressive, all right? The only thing I will say is that as you can see in our margins, we paid careful attention to product cost reductions. We're beginning to see some of that, and we should experience some of that more going forward.

Okay, great. All right. One last question, then I'll cede the podium. The -- you filed an 8-K just a couple of days ago about an option to sell, I guess, the second part of your corporate campus. And so there are options -- and if both options are exercised, from what I'm just telling here, it will bring in about $40 to -- $40 million in cash. You already have a high cash position, and I understand that you need to have so much cash in your balance sheet to -- when you're doing business with your carriers. You want to obviously be -- you have a strong balance sheet, don't want to be the next Nortel or something like that, so you want to demonstrate that with your balance sheet. But I would think that you already have above and beyond that level, I guess, roughly $100 million. You have a good amount of money above that level of cash on your balance sheet, especially if you get proceeds from those options on your corporate headquarters. Just wanted to revisit that question and not so much about if you're going to use it for share buyback like it was asked of you previously. But just are you considering uses for that additional cash that you could be obtaining? And I also like -- if I could hear some cash generation you'll start, be creating here organically, contributing to your cash position. So you're going to have a lot of cash on your hands. What are you considering doing with it?

Okay, great question. Jonathan, let me start by clarifying something. So that the option -- or if you roll the 2 building -- let just give you just a bit of background. So we have a campus in Santa Clara, which is a sizable campus. We have an option to sell the east side of the campus, and we now have an option to sell the west side of the campus to the same developer. It provides that developer a lot of efficiency. And so the price for the -- or the price that's on the table for us to close and they have an option to close has a total of $48.5 million together. So I just wanted to clarify the number, okay? So regarding the uses of cash, clearly, the cash is not on hand, all right? So I don't want to presuppose what we would do with cash that hasn't materialized yet. They are paying for the option, so we do -- are receiving payments for option, and so we do have confidence that, that will come to a successful closure. But until it does, I don't like to count my chickens before they're hatched, right? And I'm sure you can appreciate that and our investors will as well. Nonetheless, this -- we expect that this will close on or about December. If it closes on or about December, we've got a little bit of time to determine what we want to do with that cash, so I don't have an answer for you now. But clearly, your point is well taken that it is a lot of cash, and so we need to think about what is the best use of that cash.

Okay. So -- and the way I understand it, it should happen by December of this calendar year. You're selling east part and another part of your campus. It's not a sell-the-campus-and-then-lease-it-back kind of situation. And then at some point, you update us in terms of what -- once you have the chickens in hand, what are you going to do with them.

Exactly. And I think that, that's something we owe our investors forthcoming about what we will do with our cash. So I don't have an answer for you today, and again, the money is not in hand, but certainly, we need to do some planning around that. The other thing I just want to clarify is, you're right, it's not a sale leaseback, so we would not be staying in the building long-term. However, we also have negotiated that we don't have to move immediately, so we can make sure that we prudently take the time we need to find the rightsized campus and the right location for us as a business. So we have time to do that.

That implies that you could be moving your headquarters then in the next -- by December?

No, no. It implies that after December, we have a time period by which we -- the developer would like to develop the property and like to move the heavy equipment in here. But -- so we would have to move, but that gives us 2 years of option. And we have the option to get out before the 2 years, but it gives us very favorable market rates for rental expense at the same time that -- while we're looking, okay? So I think actually it's a good deal for us.

And we'll take our next question from Rohit Chopra from Wedbush Securities.

This is Ryan Flanagan on for Rohit Chopra. You guys got to a few of my questions already. I did have a couple of follow ups. Related to visibility in general and the demand environment, are you guys seeing any weakness? You had mentioned some signs of weakness in Asia geography, but there was a pipeline of larger deals there. Besides those deals, what's giving you visibility for revenue to ramp here in the second half of the year?

Well, we continue to see a solid pipeline when it comes to the Americas, right. The Americas has performed well, both North and South America. I think the reorganization of those teams has reinvigorated that team. Flattening of the structure has been good. We're seeing a lot more deals. We're getting more to the deals, and we're able to participate in more deals. So as a result of that, I think that gives me better visibility than what I had a year ago. In Europe, we've done a lot of scrutiny in Europe in terms of -- because due to the macro environment and where we are, we've done a lot of scrubbing of those pipelines. So I think we've got very good visibility there. And actually, Europe is the team that has the most amount of tenure and statistics, et cetera, and performance over the time of the company. So a very sophisticated view of how we effectively forecast there. Asia Pacific is the one that is a little bit -- it's spotty, right. Select countries have issues in terms of macroeconomics. We also have larger deals there. But using the word lumpy, I hate using the word lumpy but I'll use it anyway because probably the best word to describe it. As those big deals that sometimes come within one side of the quarterly boundary or the other side, so they can really fluctuate our revenue out of Asia. So let me stop there to see if that gives you the answer that you want.

Yes, that helps. My last question was, you talked a little bit about ASPs in terms of a competitive environment. Besides ASPs though, just general competitive environment, are you seeing any changes there, domestic versus international? Maybe some comments on any discounting in the quarter as well.

From a discounting standpoint, as I mentioned earlier, wasn't significantly different than what we've seen in the past couple of quarters. We did have one very large deal in the U.S. that put a little bit of pressure on margins and on the overall discounts, but the underlying trends appeared to be pretty constant at this point.

I mean, one of the things I'm going to say is that we are being aggressive in trying to grow our share, and especially when it comes to 10-gig and 40-gig technologies and in the campus, 1-gig and 10-gig technologies. As a result of that, when we realize that there are strategic deals on the table, we will invest by making sure we get the right initial pricing into that -- those customers that are going to prove good extended business long-term. So we want to be aggressive about acquiring market share. We know we have other competitors out there that are aggressive as well. So we don't want to say no strategic and important deals. What we do stay away from are deals that don't make any sense for us that are neither strategic nor important and yet, they bring a low margin. Those are deals we stay away from.

And then we'll take our next question from Steve Bowman [ph] from Divistar Capital [ph].

I wonder if you could just start with probably the most difficult question, and Oscar, you touched on this a little bit before but I don't recall you guys, in recent history at least -- and so maybe that means the last decade, getting such strong product reviews and getting such recognition from industry analysts. And I just wonder if you can talk a little bit about how that changes the business and maybe any sort of quantification you can put around about how many different opportunities you're going to see and what that does to the pipeline.

Sure. I'll do the best that I can on that one. Look, the honest truth is that Extreme has always had great technology. I think that we have just not really gotten the education out in the marketplace, either to customers or to a lot of the analysts for them to understand how our technology really adds true value and differentiation to our customer base. Yet at the same time, we've got some significant customers that have bet on Extreme in the last decade and as a result of that, they run their businesses and they swear by Extreme. So really for us, it's been a question of continuing to invest in technology and then getting the word out there in the appropriate venues to make sure that we can get the word spread as widely as possible. The end result of that is, and I'll quote one of my country heads in Europe. His reaction after I talked to him in early January was, Oscar, I'm actually getting calls from customers as opposed to me having to go and try to push on the rope to get into customers. So the end result is that we suddenly, not only get to see more deals, but we actually have customers who are very appropriately looking at RFPs that they're about produce. And saying, "Who is -- what are the list of vendors that needs to be on these RFPs?" Sure, it needs to be XYZ, but it should also include Extreme as well. And that's really the end result. So we should begin to see more deals. We should begin to see higher pipeline as a result of that. And we won't fit everywhere, I mean, don't get me wrong, I'm not trying to paint a panacea here. Where the places we fit and we fit well, we should win more deals than we otherwise would have won before. That is what I think is the end effect. And that will help to grow our revenues. And I'm expecting to see revenue growth really starting in Q4 and then moving into FY '13.

Great. Well, that's helpful perspective and certainly exciting to have product that customers are excited about. So I'm looking forward to seeing that develop over the rest of this calendar year. Just a couple more quick ones. And touching on the real estate transaction that you guys discussed a little bit earlier. Obviously, you had the first part of this deal announced, I don't remember when that was, maybe 9 months or 12 months ago. And it was my perception that you guys felt not necessarily confident that, that deal was going to close given the history of having entered into an option agreement some years past, prior to you guys joining. Is it fair to say that your confidence that this is going to close has gone up significantly with this second part of the transaction?

Well, I think so, yes. I mean, we've been in deep negotiations with the developer through the developer, a lot of things that ebb and flow, are based on the market for real estate. And so what -- yes, what they want to be here is convert this campus where we are. And if you know where we are, we're in a bit of a residential area. They want to convert it into high-density residential and commercial. So a lot of these types of developments are going up in this part of California. And so the past deal issues were really based on would the city give them all the permits that they need? Will they really get -- be able to do and get through all the hurdles that they need to get through? Now I think they see better line of sight to get into those hurdles, of course, you have to complete the process. So I don't want to pretend as though everything is done, but the option is there, and we're a lot closer within the 12 months, because we believe that a lot of the hurdles have been crossed for the first part of the campus and now the second part of the campus, adding that to the deal makes it that much easier. So we don't see those issues now as we've seen them in the past.

Okay. That's great. Does the developer have any incentive to exercise this option early? I mean, if the approvals from Mountain View or Santa Clara come through, could they decide to exercise the option in the middle of the summer and have a little bit more certainty about that?

Yes, we don't believe that the approvals will come through any earlier, and so we will need to be prepared that the approvals will come through on time or potentially be delayed. And we're talking about regulatory aspects of things that have to -- the things that would have to be completed. So our belief is that we seem to be on track, and we're watching it on a daily basis. But we believe that at this point, it is different than the way it was a couple of years ago.

Great. Last question I have. I guess this is probably for Jim. Jim, you mentioned litigation expense in the December quarter as contributing to the increase in operating expenses. Is it possible to predict litigation expense in the future? Or is it a cost of business given the IP litigation landscape? Or is it more of a onetime item into the December quarter?

Yes, I think it's an ongoing cost of just being in this industry. I think that the cost that you saw this past quarter were significantly higher than what a sort of normal run rate would be. If you look at just the G&A expenses quarter versus how it's trended over the last 3 or 4, significantly higher. So I would say that the level that we've seen in the last 3 or 4 quarters is more in line with the normal kind of expenses associated with litigation activities being baked into our expense base.

Okay. And I think you've mentioned that it was this successful case in the December quarter. Does that mean that somebody sued you guys and you successfully defended for noninfringement?

Yes, that's true.

And we'll take our next question from Dan Weston from WestCap Mgmt.

Most have been answered by now, but just quick follow-up on the real estate related assets. Could you remind us what the total square footage of those 2 campuses are?

I believe it's 275,000 square feet. It's 16 acres. I think the more relevant thing is 16 acres, because I think the developer would have very little use of the existing buildings. They will be rebuilding.

Understood. Okay, that make sense. And the -- can you share with us at all, I know that there was contingencies on the first option relating to getting the zoning approval for residential. Can you inform us if that has been approved at this point, at least on the first piece?

No, that has not been approved yet at this point. But in terms of just the desires of the city and what they're looking for in this property going forward, that's well-aligned with what the developers are proposing in terms of a buildout plan. The other thing I would add here that I think is important for our investors -- and since I mentioned the 275,000 square feet, our expectation is that as we find a new home, within the area, we will not need anywhere near that square footage. Because of the movements that we've made in our transformation as a company, we've made a lot of movement of R&D and R&D labs to the Raleigh, North Carolina area and to Chennai, India. As a result of that, we no longer have to replicate the same type of square footage in the Santa Clara area. That's going to create some efficiencies for us going forward.

Good enough. And just to clarify, the new option hold on the second option, Extreme Depot. That is an entity that's affiliated with Trumark.

Same entity, yes.

Same entity. Okay. Great. And last one on this note, could you share with us what exactly the option payments are and are they quarterly?

There are some milestone payments, of which we've collected $1 million to date. I don't know off the top of my head what those milestone payments are leading up to the exercise. But there will be similar levels of payments over the next year here.

Okay. Fair enough. And like I said, most have been answered. I guess, one follow up on the maintenance. I didn't see any announcement for your annual meeting in 2011. Can you give us an update on when you think that may take place?

Sure. Actually, we have just set a date for the annual meeting. It'll be March 21, Wednesday, March 21, 2012. And you should see that going out as part of our Q on Monday. Well, it's at 2 p.m. by the way, so if anyone, any of our investors would like to drop by, we'd be happy to host you.

And our next question comes from Jeffrey Meyers from Cobia Capital.

Great. I guess, most of my questions have been answered too. But one -- two questions actually, both for the balance sheet. First one is, I guess there's movement of your assets from PP&E into assets held for sale, is that just a building or is there something else?

Yes, the first half of the property that is considered pending sale. We're within the 1-year window and have met all of the criteria in terms of the probability of it being sold, that we were able to reclass that.

Got it. And there -- do you have any estimate, I guess, at this point what your rent expense might be if you do sell the building and have to find a location elsewhere?

Yes. I mean, we have looked at it. Because the campus here is 4-plus-times the size of the footprint that we will need in a new location, the P&L impact of moving from here to another location is minimal.

Okay. Okay. And last question is just on the linearity. I guess this past quarter was pretty backend loaded. Do you have any sense, what the current quarter might look like in terms of linearity?

There's nothing to indicate that it would be out of the ordinary this quarter.

Okay. Thank you. This does concludes our Q&A session for today. I would like to turn the conference back to your host for any concluding remarks.

Well, I would just like to say thank you to everybody for joining. If you have follow-up questions, feel free to give us a call, and we'll talk to you again soon.

Thank you, all.