Good day and welcome to the Aerohive Second Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the call over to Ms. Jessica Stancil. Please go ahead, ma’am.

Thank you, operator. Welcome to Aerohive Networks second quarter 2018 financial results conference call. After the market closed today, Aerohive issued a press release through Business Wire. The release is also available on our website at aerohive.com. This call is being webcast live on the Investor Relations section of the Aerohive website and will be available for 30 days. Today’s call is being hosted by David Flynn, President and Chief Executive Officer; and John Ritchie, Chief Financial Officer and Chief Operating Officer. During the course of today’s call, management will make forward-looking statements including statements regarding our projections, operating results, expectations for future revenue growth, operating profitability and operating margin, plans for future investments, product development, deployment, adoption and performance and expectations of customer buying patterns and the growth of the market for our products and business generally. These forward-looking statements involve a number of risks and uncertainties some of which are beyond our control, and the actual outcomes and results may differ materially from those contemplated by these forward-looking statements, as a result of these uncertainties, risks and changes in circumstances that could affect our financial and operating results, including risks and uncertainties included under the caption Risk Factors and Management’s Discussion and Analysis of financial condition and results of operations in our recent annual report on Form 10-K and quarterly report on Form 10-Q. Aerohive’s SEC filings are available on the Investor Relations section of our website at ir.aerohive.com and on the SEC’s website at www.sec.gov. All forward-looking statements in this presentation and the reference press release are based on information available to us as of the date hereof, and we disclaim any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they are made, except as required by law. Today, we will be discussing both GAAP and non-GAAP financial measures. The non-GAAP financial measures have been adjusted to exclude certain charges and are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures and a discussion of why we present non-GAAP financial measures, please see today’s press release available on our website. And now, I’ll turn the call over to David Flynn, President and CEO of Aerohive.

Thank you, Jessica, and thank you all for joining us today. We have been very hard at work for the last several quarters to transform the Company by improving our execution and reducing our dependence on the U.S. K-12 market. We believe our second quarter results show important progress of this plan with strong financials, improving profitability and double-digit growth outside of the U.S. K-12 market. We strengthened our product line, including being the first enterprise vendor to ship 802.11ax and we’ve optimized our cost structure and are operating with discipline. We are looking forward to returning to growth in the second half of this year as you will see in the third quarter guidance that John will provide later on the call. Now, for the highlights of the quarter. We are pleased to report second quarter results at the high end of our guidance range for revenue, with the record subscription and support revenue, and strong growth in deferred revenue, demonstrating our progress moving towards a SaaS-like business model. We also had exceptionally strong cash generation of approximately $10 million in the quarter, and an EPS beat resulting in non-GAAP profitability of $0.02. Our second quarter results are continued evidence of progress in our vertical diversification strategy as we’ve delivered strong double-digit year-over-year growth rates in our enterprise business, which led K-12 to be only 33% of our business in the second quarter compared to 46% a year ago. In the Americas, our non-K-12 business grew approximately 20% year-over-year. In the rest of the world, we delivered revenue growth of 18% in EMEA and 107% in APAC. Now, I’ll discuss a few key wins for the second quarter. Q2 was a particularly strong quarter in retail for us. One key win was a mid-six-figure project at Pier 1 Imports…

Thanks, Dave. Good afternoon, everybody, and thank you for joining here this afternoon. Before I begin, I’d like to remind everybody that all numbers discussed today have been adjusted for ASC 606, which took effect January 1 of 2018. Now, moving on to the quarter, I’d like to highlight some financial and operational milestones achieved by Aerohive in the second quarter. We exceeded our guidance metrics for non-GAAP EPS and non-GAAP operating margin. We came in at the high end of our guidance range for revenues and non-GAAP gross margin. Our cash and investment balances are at the highest levels since late 2015 and our subscription support business set all-time records for revenues and gross margin. And lastly, as Dave mentioned, we signed an important distribution agreement with Juniper. During the balance of my prepared remarks, I will cover our GAAP and non-GAAP P&L, our balance sheet for the second quarter and provide some related commentary on our business. I will close by reviewing our financial guidance for the third quarter of 2018. Now, moving on to the second quarter results. Revenue came in at $40.5 million, up 13% sequentially and down 4% on a year-over-year basis. The primary driver in the modest year-over-year decline was related to our planned decreased dependence at the U.S. K-12 vertical, offset by significant improvement in our enterprise business. Product revenue in the second quarter was $29.3 million, up 17% sequentially and down 9% on a year-over-year basis. Subscription support contributed a record $11.2 million in the quarter for 28% of total revenues, up 5% on a sequential basis and up 11% compared with the same period a year ago. Moving on to geography. Revenues in the Americas came in at $23.4 million or 58% of total revenue. Americas revenue was up $2.6 million…

Thanks, John. In closing, we are pleased with the progress we are making. We are executing our plans are poised for growth in the second half of the year. I’d like to thank our partners, customers, and employees for their support and loyalty as we continue to improve our execution. And we’ll now take your questions. Operator?

[Operator Instructions] And we will take our first question from Mark Kelleher with D.A. Davidson. Go ahead sir.

Great. Thanks for taking the questions. Congratulations on a pretty solid quarter there. Can you give us an update -- I know you talked about Juniper, and that’s just getting up and running, maybe given -- did that contribute in the quarter? And maybe talk about Dell and how that’s doing.

Yes. So, with regard to Juniper, we’ve been working to put in place -- for much of Q2 working and put in place the partnership and the transactional models, which we just announced the last days of the quarter. So, it did not contribute to Q2 results. I did comment in my script that we have booked some significant deals already in this quarter and are fulfilling them including a big project, one of the largest cities in the U.S. So, we are excited about the early progress, but it did not have any impact on the Q2 results. And with regard to Dell, obviously, we continue to have the Dell partnership; we now added the Juniper partnership. Our plan, now we have two partnerships of strong switching vendors that are selling here Wi-Fi. Going forward, we don’t plan to comment on specifics between the two of them for a competitive reasons in the companies.

Would you say Dell is -- you just sold more through Dell than you did last quarter, just some general metrics around that?

Well, just to be clear, we didn’t have any transactions in Q2 with Juniper. So, the short answer is yes, we sold more through Dell. But as Dave mentioned…

Not between the two, not between Dell and Juniper; between Dell this quarter and Dell last quarter? Did you sell more Dell this quarter than last quarter?

Did we sell more Dell Q2 than we did Q1? The short answer to that is no. We did not sell more in Q2 than we did in Q1. And we don’t want to get in too much more specificity on that because of the competitive nature of our relationships.

Does the partnership with Juniper impact the partnership with Dell?

No.

No. We see them as a -- I’m sorry. You broke up there. What was that?

No. I was just wondering if Dell might be less inclined to work with you if Juniper is working more with you.

No, we’ve seen no indication of that. I think that they tend to sell to slightly different kinds of customers. We have engaged -- we’re engaging effectively with both. So, we don’t see that as an issue. The Juniper partnership shouldn’t impact our Dell partnership.

Okay. And if I could flip to another question and the 802.11ax, what’s your perception on the adoption of that? Is it still in the very-early stages, are we in the third inning? Where are we in terms of rolling that out, and what kind of visibility do you have on that?

Yes. So, in terms of rollout, it’s absolutely the first inning. We’re the first vendor in the industry to ship it. So, we’re way ahead of the competition. And so, -- and at this point, the interest is high because a lot of customers are starting to understand, it’s the next generation of Wi-Fi. We’re thrilled to be at the forefront and are getting a lot of visibility because of it. In the short-term, the sale is going to be largely a future proofing sale on the part of the customer where they’re putting in Wi-Fi infrastructure they want to last for 5 or 7 years and they want to put in the latest and greatest. A lot of them are looking to put in AX, because they know it’s the future. But, the reality is, AX clients aren’t available yet. So, there is not a measurable benefit of it today. But, if you are going to put in something today, next year, you are going to have AX clients showing up and a lot of forward thinking customers are interested in putting it in. So, they are ready for the next 5 to 7 years of wireless. We’ve already built -- I mentioned we’ve built a significant backlog kind of well into the 7 figures. So, significant backlog of AX products when we started shipping to our first customers.

And just emphasizing what said on the call, we really are seeing the halo effect of being viewed as much more of the innovative leader in the space between 802.11ax, for standalone security product, the pluggable APs. If you want to talk to the innovative leader in the space, you are going to pick up the phone and talk to us.

And our next question comes from Chase Bunnell [ph] with Dougherty and Company.

Hi. This is Chase. Thanks for taking the question. I’m on for Catharine Trebnick. And we had a question about your recent product releases. With so many of them coming out recently, what improvements have you seen in your launch process and how do you expect that to kind of impact your position going forward.

You’re right. We have introduced a lot of products recently. We introduced SD-WAN in January and then Atom, the pluggable AP, A3 the secure access security product now AX. So, we’ve been very busy working to launch these things to our sales force and through our sales force to our channel partners. I think, we’ve -- there’s a lot of ongoing effort to create awareness and largely to train the channels and our sales people to understand the products. We feel we’re making good progress on that. Although there’s a lot to do, there’s so many new products that have been introduced that they’ve not materially impacted the revenue, largely the revenue growth we’ve had over the -- in Q2. The success we had in Q2 was strength in the core wireless business and the switching business. But augmented by the halo effect of all these new products, it’s increasing the buzz and awareness. I think we’ll be continuing to work for the next few quarters to continue to train the channels and to fully capitalize on all the products we’ve delivered into the market.

Awesome. And then, the last one was just on the education market. What’s your kind of -- or what’s kind of like an update on that and where do you guys kind of stand on that going forward into the rest of the year?

So, as we talked about previously, we’ve been actively working to diversify our business mix and reduce our dependency on the K-12 market and in particular the U.S. K-12 market which has been very volatile. And we’ve made great progress on that. As we highlighted, the dependence on education this quarter was down from 46% a year ago to 33% this year, which is a great move to diversify the business. The U.S. education business was down year-over-year, as expected. That was factored into our annual operating plan and our guidance for the quarter. And it’s been down, especially the E-rate program, each of the last three years has been sequentially down at a market level. Our share has been largely unchanged in that market. So, we feel we’re holding our own and doing well, but it’s a declining market, which is why we’re focusing on growing the other markets. Overseas education did grow year-over-year but it’s a much smaller percentage of the total.

And next, we’ll hear from Christian Schwab with Craig Hallum.

Hey, great. Thanks for taking my question. So, congratulations on returning to year-over-year revenue growth in the back half of this fiscal year. Given your product leadership that we’ve been highlighting as well as expansion of potential growth opportunities with relationships with Juniper and Dell, what do you think on a multiyear basis we should expect the top line for you guys to grow exiting this year? Not exactly specific guidance for ‘19 but kind of over a three-year timeframe, what is the range of outcomes that we should consider to be logical?

It sounds awfully much like multiyear guidance. I would tell you that we -- and Dave chime in, but we think with the product portfolio, where we’re positioned in the market regaining what we really believe is the kind of -- at least amongst the innovative leaders if not the most innovative company in the space. Mid to high teens I don’t think is unrealistic. But again, lots of -- economic cycles, all kinds of things could happen to that. But, I think with the improved execution you see now that was lately, heading back to growth for the back half of the year, I think, a long-term model of mid to high teens with approaching the same level of operating margin and I could tell you the time frame it would take us to get there, but we still think that that’s an achievable goal.

If you look at a lot of our metrics this quarter, you saw those strong double-digit growth rates and many of them 20% growth outside of it -- the decline in U.S. education market. So, I think we’ve demonstrated in the number of the markets that we can do that already. And as education becomes a smaller percentage of our mix, we’ll have a less of a headwind from it.

So, just one other comment on that. I think we’ve been very clear in terms of our view, our road to profitability is driving efficiency out of that sales and marketing line. We had a multiyear low in that in the fourth quarter. And the profitability that comes out of our recurring revenue business, our SaaS-like model, hit record revenue levels, hit record gross margin levels, you pour a little bit of revenue growth on there, and we’re bullish about the future.

And there are no further questions in the queue. I’ll turn it back over to our speakers for closing comments.

All right. Thank you. Thank you all for joining us today. We look forward to seeing many of you soon at conferences and on the road. Good night.

And that concludes today’s conference call. We thank you for joining.