Good day, everyone. And welcome to the Extreme Networks First Quarter Fiscal 2016 Earnings Results Conference Call. This call is being recorded. With us today from the company is Ed Meyercord, the President and Chief Executive Officer; Ken Arola, the Chief Financial Officer; and Frank Yoshino, the Vice President of Treasury and Investor Relations. At this time, I would like to turn the call over to Frank. Please go ahead, sir.

Thank you, Karen. And welcome to Extreme Networks first quarter fiscal year 2016 earnings conference call. This call is being broadcast live over the Internet. It's being recorded on behalf of the company. Should you wish to not be recorded, please do not ask questions during the Q&A. The recording will be posted on Extreme Networks website or replay shortly after the conclusion of the call. The presentations and the recording of this call are copyrighted property of the company and no other recording or reproduction is permitted unless authorized by the company in writing. By now, you've had a chance to review the company's earnings press release. For your convenience, a copy of the press release and supporting financial materials are available in the Investor Relations section of the Company's website at extremenetworks.com. I would like to remind you that during today's call, management will be making forward-looking statements within the meaning of the Safe Harbor provision of the Federal Securities laws regarding business and financial outlook. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by those statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after the call. For a detailed description of these risks and uncertainties, please refer to our most recent report on Form 10-K filed with the SEC, as well as our most recent Form 10-Q filed with the SEC, in addition to our earnings release posted a few minutes ago on our website. Throughout the conference call, the company will reference some financial metrics that are derived in accordance with Generally Accepted Accounting Principles or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the company's results internally. Our non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. Reconciliation of the non-GAAP information in accords with GAAP measures is in our earnings press release issued today. In preparing non-GAAP information the company has exclude where applicable the impact of acquisition and integration costs, purchase accounting adjustments, amortization of acquired intangibles, restructuring charges, and share based compensation and overhead adjustments. Now, I'll now turn over the call to Extreme's President and CEO, Ed Meyercord for some opening comments.

Thanks, Frank. And good afternoon, everyone. And thank you for joining us today to discuss our Q1 results. We are at Las Vegas at our Partners Conference and we are with over 450 global partners and what has been a very productive week. The energy level here is high, excitement surrounding our product roadmap, our solution selling strategy and our growth incentives are on display. This is my first Extreme Partner Conference and I must say I am impressed by the strength of our partner relationship, our partners' commitment to grow their Extreme business and the quality of the dialogue is excellent. I'll kick off the call with commentary on the quarter and then talk about our progress with our solution selling strategy, our operating initiatives and our business outlook. Then Ken will go through the numbers and we will open it for Q&A. Let me start off again by saying how pleased I am with the solid execution by our team at Extreme during what is historically been a very soft quarter. I have been in the CEO seat now for six months and I like the way this team is coming together. They have accomplished a lot in a very short period of time. From an operations perspective, tough cost cutting measures we took in Q4 seem like a distant memory with all the growth initiatives we have underway. But from a financial perspective you can certainly see the effects of our cost reductions and our strengthening financial position. But may have been missed by all the attention that the cost value equation, is it we reorganized the function of department at Extreme to establish a customer driven organization structure. Extreme was an engineering led company with engineering controlling all product development, product marketing and customer service. We…

Thanks, Ed. Before I jump into the numbers, I want to echo Ed's comments about the team coming together at Extreme. People are excited about the way we have reorganized to become a customer focused company. And the alignment around our software driven networking solutions strategy has created excitement within our company, our partner community and our customers. In addition, the coordination and team work between our sales organization, our supply chain operation, our distributor network and our finance team has improved market lead over the past two quarters. We are getting much stronger as a company and our results reflect it. Now let's review our first quarter results starting with revenue. Q1 GAAP revenue was $124.6 million compared to $149.9 million in quarter four and $136.3 million in Q1 a year ago. Q1 non-GAAP revenue was $125 million compared to $150.6 million in quarter four and $137 million in Q1 of last year. Q1 GAAP and non-GAAP product revenue was $91.4 million compared to $116.3 million in quarter four and $102.7 million in Q1 last year. Q1 GAAP service revenue was $33.2 million compared to $33.5 million in quarter four and $33.6 million in Q1 of last year. Non-GAAP service revenue for Q1 was $33.6 million compared to $34.3 million in quarter four and $34.4 million in Q1 of last year. The geographical split of revenue was comparable to last quarter with North America revenues contributing 50% of total revenue. EMEA revenues 37%, Asia Pacific revenues 9% and Latin America revenue is 4%. Moving on to gross margin and operating expenses. In Q1, GAAP gross margin was 52.3%, compared to 50.9% in quarter four and 51.8% in Q1 last year. Non-GAAP gross margin was 55.2% and compares to 54.4% in quarter four and 55.6% in Q1 last year. The…

[Operator Instructions] Our first question comes from the line of Simon Leopold from Raymond James.

Hi, this is Victor Chu in for Simon Leopold. Could you give us just a little color around E-Rate spending? And your comments around it was slow out of the gate, what's the kind of trajectory that we should kind of expect and how is that impacting kind of what you are hoping for?

Yes, Hi, Victor. This is Ed. What we said about E-Rate were this quarter it came in and the low double digit, we are expecting it to be somewhere between $10 million and $20 million mark. As everybody knows with their funding letter come out of the SEC we have to -- that we are relying on that and then when schools get the letters then we follow through in terms of deployment. So it was little slower that we had projected. So it is going to be little closer to the 10 number than it is to the 20 number. And the second quarter we are going to expect to see that be closer to the 20 number. If that's helpful. As far inside sales, one of the things that we did we restructured our field sales organization. What we did is we took out accounts that are less than 65,000 and we created an inside sales team to cover the accounts. And we did want to do as our field forces making calls to the smaller size customers where it is not economic. But what we -- those who are database create unless it create kind of time negotiate teams and we went to that process, we got a late start. So we didn't start inside selling really earnest so the last the second half and really the last month of the quarter so we -- and we miss the selling opportunity to that base of existing accounts. Now we are running and we will have the full three months, so we will -- that recover as well so those were the headwinds for the quarter for us, it was little later on E-Rate side and slow start in inside sales, other than that things are going great.

Okay, great. Can you -- one last question, can you just give us update on your thoughts for timeline around the WLAN cycles? And how that -- when that -- how that impacts you in kind of the timeline because I guess --

Yes. So AC Wave 2, we mentioned that we are coming out with our new access point this quarter. And we are right in the heart of the E-Rate selling season for the next cycle. We are really excited about the cloud management platform and what that is going to enable us to do and our partners do in wireless and that's going to come out in fiscal Q3. So that's the timing and then following that will be the access layer switching, the hardware deployment that will come out in the middle of the next calendar year. And then we are also going to come out the next version of the software which is really exciting where from a cloud management perspective you are going to be able to manage both wired and wireless switches and that's going to be in the middle part of next year as well, probably the calendar third quarter of the year. That's going to be differentiator for us. Not a lot of people are going to have that capability and we have a lot of partners in distribution system here and we have lot of partners that are really excited about that because cloud management tool allows them to provide managed services which is where the partner community is going. So there is a lot of excitement out here. The partner conference around this cloud management capabilities and we are on track from a development perspective.

Thank you. And our next question comes from the line of Matt Robison from Wunderlich.

Hi, thanks. Congratulation specially getting done without the E-Rate so much. Have you got put the Wave 2 products into beta yet or is that timeframe later this quarter when you get into beta? And you differentiate between them and general availability.

Yes. We've already timed -- we are in beta testing and planning on launching that. So we will be putting that out in the field and it's GA in our fiscal Q3. I am sorry; it is going to be GA in this quarter.

Okay. And can you comment on what verticals were particularly strong and how you are situated with the legacy customers of Enterasys and how is that changed over the last couple of quarters?

Sure. Well, verticals have been -- they have been steady, E-Rate is slowly shine a light on K-312 and overall education for the company. That's an important vertical for us particularly in U.S. We also are very focused on healthcare, that's globally we continue to see strength there. We have manufacturing, we have government accounts, and we have hospitality. We have our stake in venue business, and I would say there is not a lot of change in terms of mix in the quarter with this verticals. What's going on inside the company that we are excited about is the collection of all the information around these accounts, I mentioned Charité which is the largest hospital in Europe. They are doing some very innovative things as far as solutions for hospitals. But it is collecting what our customers are already doing with our technology and our portfolio, organizing this, and having this reference accounts, organizing marketing materials around it, having educational programs to train our field forces, to train our partners. So then they can bring these solutions out to their customers. And we Extreme are now as you know this has been somewhat of decentralized sales and marketing company. The fact that we are centralizing this means we are getting much tighter focus, we are going to have much cleaner execution and this going to be easier for us to accelerate and to invest in growth both with our direct field forces and our partners. As far as the Enterasys question, I know you are familiar with the fact that there was a decision to combine EOS and XOS the operating system and Enterasys and Extreme, we reverse that, we led the face of Enterasys customers know that EOS is alive and well and we are investing in features with that operating system. That had a big impact. We are also doing something in terms of our plans and our roadmap for the Series S modular switch that customers are excited about and so I think with the Enterasys customer base I think the changes we just made recently has created a new excitement that there is a future and they can see the future roadmap and so I think the overall comment would be that, that stabilized.

Ken, a couple of housekeeping questions. Can you give a breakup for depreciation and amortization and then comment at this low level of capital spending is sustainable and what we should expect for the year in that regard?

Yes. Depreciation is roughly about $3 million in the quarter and amortization is about $9 million shows up in cost to good sold, then operating expenses kind of split about 50:50. As far as CapEx is concerned, yes, it was little bit low this quarter at about $600,000 and are typically we are spending a little bit more than that. So I think if you think about as a $1 million or $2 million in a quarter is reasonable.

Thank you. [Operator Instructions] Our next question comes from the line of Christian Schwab from Craig Hallum.

Hi, congrats guys on a great quarter. When you guys look geographically into Q2 would you expect EMEA or Asia Pac to be up on sequential basis? I know you guys talked about increased visibility into that guidance and so we've got some different changes in leadership in those areas. Would you expect that?

Yes. Hi, Christian, this is Ed. Yes, we would. We got a really strong pipeline in EMEA, lot of confidence with that team with in this quarter. And we made leadership changes in APAC. So we have a new regional VP out there who is doing great things. He is come in with lot of industry experience, lot of ideas. I can't share with you his forecast because he is very optimistic and very aggressive. And let's just say we are expecting good things out of that region. And also Latin, we hired a very strong leader in our Latin market thus currently being managed through U.S. Canada, it's going to take time but we've got really solid people on board now and we've got a foundation to build on.

Perfect and then if we just do some basic math, you guys won about $90 million E-Rate, last quarter you had unexpected big deal let's just pretend it was $10 million and then we got another $10 million this quarter so that leaves us like $70 million, some may not get approved and no surprise that the government is behind, so I guess it is fair to say to some degree I would assume E-Rate will linger into Q3.

Yes. That's fair to say. Christian just to elaborate a little bit, what we said we are getting better visibility to around how E-Rate cannibalize normal K-12 business et cetera so as we are piecing together the overall equation what's interesting is math really hasn't changed, what we told people from the beginning which is we see incremental revenue, debt incremental revenue between $30 million and $35 million from E-Rate this year. I can't say we do exactly the algorithm how we got there but it is holding up and it is accurate. So that's still good number and incremental number to think about.

That's wonderful. Do we have as far as the pipeline -- it sounds like you added the comps, congratulation on that, as far as we've looked to stadium work, either in pipeline or potential deal is -- is there any seasonality as we think about your fiscal year where they are ends being more either in major league baseball or the NFL or college stadium as we can think about that.

Yes. I think what you are saying is -- your intuition is correct, the seasonality in terms of what's going to happen in the off season. Yes, I am not sure, we don't really provide specific forecast around it. We don't disclose that to the street, but yes that is correct, your intuition is right.

Thank you. And our next question comes from the line of Alex Henderson from Needham & Co.

Hey, guys. Let me start off with just some housekeeping, can you pick what's in the other expense net line that was pretty considerable number in the quarter, swinging the year-over-year, I just not sure what's cause that.

Yes, Alex, that's where the FX gains and losses show up in our P&L in relation to what we deal from the balance sheet for inter company accounts. So yes the dollar strengthen pretty nicely against the Brazilian Real in particular and that should have the favorable impact in other income expense. That's biggest line time that driving there.

And so if as I am looking forward I should drop that out of the number into December quarter, is that correct?

Well, I think if the dollar continuing doing strong against the Real we will continue to see some may be favorability there. So it depends which direction the exchange rates go. Right now I could say last quarter we've seen some favorable impact with the U.S. dollar strengthening.

Right. I generally try to assume not to try forecast interest rate or exchange rates so based on the current level are you expecting another gain in the December quarter and if so what kind of magnitude we talking about?

Yes. It is really hard to actually give a number on that, Alex. Like I said it depends on where exchange rate go. If you assume exchange rates are staying relatively flat and where they are today then it would be a less of an impact on other income expense and maybe more normalized, but when you see a big movement like we saw this past quarter with the Brazilian Real we got some pickup and FX gain, so depending how you want to look at and model it, if you assume flat rate then nothing is going to change then you can assume that's going to come down to something you have seen in previous quarters.

They pay analysts to forecast the exchange rates more than as quite of them have to sometime -- the second question I had there is some-- I am trying to understand the mechanics around the product gross margin, service gross margin, service gross margin now 68% I believe in the quarter and product was 50% which looks a little bit richer than it had been on the service. Is that a function of restructuring benefits helping that or streamlining of the cost structure?

That realized in the quarter but if you think about with products generally running in the low 50% of margins, 50% to 52% and service is running like 63% or 64% to 67% depending on the quarter, we dropped out $25 million of product revenue in the quarter and rough call it 50% gross margin so you have a more of skewing towards the services revenues in the overall scheme of the business here which drove margin up a bit on a sequential basis.

Yes. I understand the mechanics of the shift between them, I am just trying to look at the individual line items, as I understand it, if I did the math correctly when I was doing the -- offset to non-GAAP I am getting 50% gross margin on product and 68% on services, were seemed a little steeper than it had been running 63%, 64%, 67% even and I am trying to determine is that going to stay up at that 68% level or is that going to come back into the 63% to 67% range.

Well, I guess, let me explain this way. Gross margins were in the low 50% for product this quarter, on the service side of the business it was in the mid-60s not necessarily in the high 60s, I think you will see that kind of range as we go forward in a low 50s and the mid 60s for product and services. And again we saw some statements in relation to the restructuring and cost to good sold this past quarter, we will see a little more next quarter.

Okay. I'll take that offline because obviously I must have put something incorrectly getting 68%. Just to pin down a couple of data points so I think I heard you said that 100% of the restructuring program savings that are going to be showing up in service cost savings as opposed to reinvested are now in the model. Is that correct?

That's correct. If you recall last quarter we said it was going to be -- we are targeting $40 million annualized savings about $10 million per quarter pretty equally through the year with about 10% of that showing up in cost to good sold and 90% of it showing up in OpEx. So at this point in time as we move through Q2, we are expecting that we will realize a 100% of that annualized the quarterly amount of $10 million in the P&L and that's reflected in the guidance that we gave.

And then the second piece of it is, sounds like you are under hired and you expect therefore hiring to help rebuild some of the sales marketing G&A or whatever R&D lines in the OpEx element. So we should be expecting that to be up sequentially in each in the December quarter, will that persist again into the March quarter?

I don't think it will persist in the March quarter. I would think our expenses to be somewhat comparable to what we guided this quarter, for the March quarter, assuming we get all the heads that we wanted to have hired during the quarter here we made some good progress to date so far in the quarter so if we continue with the trajectory we are on we should be on a good pace for that. I guess the other thing to think about as we move through the year payroll taxes, people pay their taxes earlier on the year as you get to the end of the year you have less payroll taxes as company and payroll taxes so we will get a little bit of pickup that as well.

Okay. And I am little confused about some of the comments on E-Rate. I just wanted to make sure I had it correct. Did you say you had $10 million of E-Rate in the September quarter, is that correct?

We said that -- I gave -- Alex gave range and I said, I'd going to say low double digits but that creates a pretty wide range for you. So what I tried to do narrow or just say if you are looking between $10 million and $20 million which is I would just say you provide that as a range for E-Rate, we came in much closer to the 10 side of that scale. We can't disclose the numbers

And then you said I thought that the other side would be closer in the December quarter closer to the upper end in that band.

You got it. You got it.

So I got the math right. So there wasn't any E-Rate in December 2014 correct?

No, pretty normal.

So that would imply if I put about $18 million just to choose a number at the upper end of that band, about 25% decline in product sales, is that right metrics and have we now stabilized that at a growth curve from here?

Your numbers are doubt right we did about $121 million in product sales in quarter four, 2014, I am sorry wrong quarter. $102 million in quarter one of 2015, we did $90 million, $91 million --

Yes. I was just looking at the December quarter front and the mid point of the guide would probably about $102 million in product sales down from $112 million let say $80 million it would right in.

Yes, that's right.

Okay. So we are kind of finish the decline in product associated with the terming of the lines and so forth now we should start to grow and then slip at the end -- from here.

I mean there is a couple of anxiety area Alex which is -- it is K-312 we are talking about and so you have existing K-312 business, your schools, schools going to have fun technology investments whether not the E-Rate program is there or not but there is a lot more incentives to do it if you get E-Rate dollars.

Net number is not as big as the gross number right.

Yes, so there are a few factors moving there. In our guidance we also have the seasonality, we look out there is no seasonally weak Q3 that we look at it in terms of trending but we are with the solution selling and leading the solution selling, we are getting a lot of traction and excitement out in the market place that's building the confidence inside of the company, in our selling organization with our partners. So just how that the positive momentum takes effect and it will hit numbers, we would be guiding on a quarter-on-quarter basis but everyone inside this company believes that we are going to grow. The question is when and this is -- we have a lot of confidence in this second quarter given the strength of our pipeline, the quality of the opportunities and piece of that is going to be what's happening in the E-Rate case and 12 segments.

Just one last question I'll leave the floor. Clearly a big part of the pressure over the last year has been your European business getting hit by a historically huge swing in the European exchange rate, that I believe is now kind of out of the picture on year-over-year basis, that should no longer be much of a factor as we start to go forward and so I would think that your proved economies in Europe would start to be a supporting factor as opposed to a drag the way it has been over the last year. Is that the right way to think about it?

I think that's how you should be thinking about it. That's right.

Yes. I agree with that, Alex.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back for any closing comments.

Thank you. Yes, I'd like to make a couple closing comments. First, hopefully you are hearing from the colleague that the confidence from the team in terms of the outlook for the company and all the things that are going on. There is a lot of momentum and there is a lot of operating initiatives around our strategy. And leading with software and selling solutions is, we've got third party validation around -- the industry analysts are telling us that this is the way to go, our partners are telling us, our customers are telling us, and we are making great progress and heading in that direction. So there is a lot going on, there is a lot of excitement around that. And as I said earlier, everyone in the company is committed to growth. The other thing is you can see this quarter, we did take tough measures in the fourth quarter and the cost is out. So now that showing up and you will see that going forward in the Q-over-Q comparisons from the cash flow perspective. So we thank everyone for participating on the call. And we are looking forward to Q2 and sharing our results in a few months. Thank you very much. We appreciate your time.